In recent weeks, there has been a lot of chatter around the royalties issue of NFTs, mainly that marketplaces are switching their stance from enforcing the practice to making it optional.

Back in 2021, when the NFT market was in full bloom, dozens of NFT marketplaces assured users that blockchain technology was well-equipped to enforce royalties, allowing NFT creators to enjoy more sustainable monetization models.

Despite this initial attitude, conditions have changed drastically in 2022. Dozens of NFT marketplaces have since ditched the idea of royalties. Marketplaces like Magic Eden, Looks Rare, X2Y2, Blur and many more have started offering zero-royalty trading, with some platforms making the "NFT royalty" feature an added option.

Because there is no hard-coded rule to pay a creator the royalties tied to secondary sales, the entire practice hinges on the traders. If the trader wants to remunerate a creator, they can. If not, no one will question them. The result has been prominent NFT marketplaces exiting the "creator royalty" model. For context, the most recent report by a pseudonymous user highlighted that just 18% of traders opted to pay royalties to NFT creators by the end of October 2022.

Expressing concern over the declining interest in royalty payments, Yard Hub CEO Yaroslav Shakula noted, "It all started incrementally after one particular case of discontinuation of royalties payment. As users pick the marketplace with the lower commission, other marketplaces also had to tweak their royalties policies. This is how what started as one-time practice ended up being introduced by multiple marketplaces."

The Shaky Foundations of 'NFT Royalties'

2021 was all about NFT marketplaces' excited cries of "giving the power and money back to the creators." However, these promises and ideas have fallen flat throughout 2022. As the crypto winter wipes billions of dollars from the ecosystem and NFT trading volume continues to decline, the "creator-first" ethos of most NFT marketplaces is fading faster than ever.

Yet, the NFT royalty model was already broken from the very outset. For instance, the creator could set royalties when minting their NFTs — typically ranging from 5% to 10%. The underlying platforms and smart contracts were largely responsible for automating the payments and ensuring that creators get paid for every subsequent sale across secondary NFT marketplaces.

Even in the early days, NFT traders could simply avoid paying royalties by engaging in P2P transactions outside of NFT marketplaces. There has never been a robust framework to ensure that creators receive their fair share. These hurdles entered a new dimension amid dampening NFT interest and growing competition between NFT marketplaces.

The problem with NFT royalties isn't new. For starters, NFT royalties were never fully enforceable on-chain. Despite being governed by smart contracts, blockchains can't enforce token transfer terms, rendering these contracts "voluntary" by design and relying on NFT marketplaces to honor terms.

From an operational point of view, NFT royalties were never guaranteed on-chain. The smart contract could only request a royalty — something NFT marketplaces and traders honored when market conditions were stable and NFT trading skyrocketed. As the market tumbled, declining investor interest in NFTs and the simultaneous emergence of many secondary NFT marketplaces made enforcement considerably more challenging.

"The Marketplaces are engaged in competitive practices reminiscent of the Wild West where they are willing to cut anyone's throat to make a couple extra dollars. These practices help the consumer in the short run, but I think in the long run the knock-on effects will hurt emerging artists the most," House of Kibaa CPO Neil Stevenson-Moore pointed out. "Consumers should be forced to honor the royalties set by the creators, and if creators are getting greedy — that will reflect in consumer sentiment. However, the marketplaces should not be putting their thumbs on the scales."

A Half-Hearted Approach in the Making

While platforms like OpenSea have started taking steps after backlash from the community, the extent to which these policies would give creators what is rightfully theirs remains to be seen. For instance, OpenSea's new "royalty enforcement" system allows NFT creators to embed a code that blocks their NFTs from being traded on no-royalties and optional-royalties marketplaces. Other platforms like Magic Eden have also floated several complicated new ideas to enforce creator royalties, but none have resonated with the creative community.

Highlighting the impacts of NFT marketplaces no longer interested in honoring royalties, MetaMetaverse CEO Joel Dietz opined, "Generally speaking, even thinking about making royalties optional or stopping to enforce them might be seen as a PR disaster to some people for that specific marketplace. Removing or reducing the cap for royalties would sort of go against Web3 principles. Build and develop upon these Web3 structures, don't break them down and move to an outdated and old structure."

There is no straightforward answer to how NFT royalties will be enforced in the coming months, especially with Web3 and the metaverse gaining mainstream traction. "If digital art creators are going to negotiate more favorable business terms with these platforms over time, then they need to do so from a place of strength," Brett Welch, VP Product for Photo at Lightricks, said. "So, if you're a creator looking for a bigger piece of the pie from the exchanges, then that's your key to success — producing a stream of awesome, original art that people can't wait to see, share and eventually buy."

Welch concluded, "If you're drawing eyeballs on social media and selling access to premium content to subscribers while offering prints on your website and building an email list, then you're basically empowered to become truly platform-agnostic. You won't get rich quickly that way, but you'll put yourself in a strong position so that the NFT exchanges will be actually eager to compromise on their profit margins just to have you on board."

(Sadie Williamson is the founder of Williamson Fintech Consulting.)

An earlier version of this article wrongly attributed the quotes in the last two paragraphs to the CEO of Lightricks. The error is regretted.

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