NFT marketplaces are having a different take on creator

Creator royalties are the incentives that continue to push them to develop innovative projects, while also making a living out of it. For decades, only a handful of commercial, successful artists enjoyed the benefits of creator royalties. However, the advent of non-fungible tokens (NFTs) made creator royalties more mainstream, thereby even providing an average creator to benefit from this mode of compensation.

In 2021 and for a major part of 2022, every NFT marketplace offered creator royalties on primary and secondary sales. In general, the creator royalties varied from 2.5% to 10% depending on the marketplace. Billions of dollars have been paid out in royalties as of October 2022.

The downturn in the broader crypto market, coupled with the declining NFT sales on NFT marketplaces, forced firms to evaluate their creator’s royalty policy in a bid to make the sector more appealing to traders. Notably, without the royalties, NFT trading will become cheaper, and the marketplaces will gain more users, thereby driving their market share. Consequently, in Q4 2022, some of the largest NFT marketplaces stopped implementing creator royalties, which also resulted in a major backlash from the creators’ community around the world. For instance,

· In November 2022, OpenSea, one of the largest NFT marketplaces in terms of trading volume, came close to disrupting the entire dynamic of the NFT market when it considered removing the creators’ royalties altogether on existing collections. However, after facing serious backlash from the community, the firm announced that it will continue to enforce creator fees on all its existing collections.

Notably, the reconsideration of its royalty policy came after several of NFT marketplaces either nixed such fees or made them optional for traders. For instance,

· In August 2022, X2Y2, one of the leading Ethereum-based NFT marketplaces by volume, announced that the platform will no longer support royalties for creators. Instead, the firm made it an option for traders to pay royalties in the form of a tip. In a similar move, Magic Eden, a Solana-based NFT marketplace, announced that the firm is making the royalties optional in October 2022.

· LooksRare, another NFT marketplace, made a similar announcement in October 2022, when it stated that collectors are no longer required to pay royalty fees to creators when purchasing the NFT platform. Instead of the royalties, the firm announced that it will distribute 25% of the platform fees to creators and collection owners to offer a more competitive solution to creators.

The shift away from royalty fees for a lot of these NFT marketplaces started when new NFT marketplaces, Sudoswap and Yawww, nixed them in a bid to garner market share in a competitive space. Rather than charging royalties, Sudoswap charges a 0.5% trading fee and lets the buyers get NFTs at a significantly cheaper rate. On the other hand, creators can take the trading fees from the pool, which can be more than what they make through traditional NFT sales.

With slashing royalty fees not received well by the creator community, the growing backlash forced a few of the marketplaces to roll back their announcement. Like OpenSea, X2Y2 also rolled back its optional fee policy in November 2022 and announced that it will continue to enforce royalties on secondary sales. These policy change announcements were part of the strategy to revive the market growth which has suffered major headwinds due to various macroeconomic factors, such as rising inflation and interest rates.

At the time when many marketplaces were making fees optional, new players entered the market to leverage the backlash among the creators’ community. For instance,

· In November 2022, Find Satoshi Lab, a Web3 gaming and development studio, announced the launch of a multichain NFT marketplace that supports royalties. Notably, the firm is positioning its marketplace as a platform that provides fair rewards to creators.

· In a separate move, Exchange.ART, a fine-art-focused Solana NFT marketplace announced a Royalties Protection Standard in November 2022. Notably, the Royalties Protection Standard enforces royalties on every secondary sale completed on the platform. The protection standard offers creators surety that their work cannot be sold on the marketplace without their consent.

Notably, the NFT market is still in its early stages of development. Of course, bypassing the royalties is one way to make NFTs cheaper and more attractive to buyers, thereby resulting in more users and market share for marketplaces, it is not sustainable from the long-term perspective. Many of the creators turned to NFTs because the centralized institutions were not offering fair rewards for their work, and by making those royalties optional, NFT marketplaces followed a similar path.

The fight over market share and adopting policies, such as nixing royalties, can further dampen the growth of the NFT market. There needs to be a way for the creators to make money from their work, whether it is royalty or something else, a constant revenue stream will ensure that quality NFTs continue to enter the market. This will not only drive the industry growth, but it will also keep the enthusiasm high among collectors, thereby driving growth for NFT marketplaces as well as the overall industry.

One of the ways in which NFT marketplaces can improve incentives and rewards for creators is by bypassing the royalties in exchange for a larger piece of the primary transaction. In fact, the NFT marketplaces can share this on both sides of the trade by making collectors pay up a buyer premium fee.

Slashing or nixing the royalty fees is not a sustainable solution and will certainly impact the industry's growth. Notably, the fight over market share, by implementing such policies, will only result in a further downturn for the global NFT market. Consequently, NFT marketplaces need to adopt a more proactive approach that works well for both creators and buyers.

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