Recently, a number of NFT marketplaces have expressed their views on royalties. At first, X2Y2 took a bold stance, proposing customized royalties (supporting zero royalty), Blur then supported incentive royalties, and OpenSea proposed a mandatory royalty contract. As a "consensus" feature that isn't forced into smart contracts but relies on centralized market rules, it has generated a lot of controversy amid the current bear market.

Current Problems with NFT Royalties

In addition to gas fees, there have always been two additional fees for buying and selling an NFT on major NFT marketplaces, namely transaction fees and royalties, both of which are paid by sellers. NFT trading platforms charge transaction fees, while NFT creators charge royalties.

In an NFT trading scenario, royalties have been used as a way to incentivize creators over the long term. The incentive of royalties can effectively avoid the problem of creators not being able to obtain subsequent income after the appreciation of their work through resales in the secondary market. However, with the increase of NFT projects, the transaction amount and volume have grown larger, and the original, modest royalties of a few percent, have become a barrier to "resale transactions" between buyers and sellers.

In addition to the higher transaction costs caused by the existence of royalties, there are also several problems with the existence of royalties from a business logic perspective.

Firstly, mismatch of incentives. The NFT project team is to gain revenue based on volatility and the trade volume of its holders, but they gain nothing from their true believers (People who would purchase their NFTs and hold them). This may encourage the proliferation of low-quality, free-casting, but pump-and-dump collections, which is the complete opposite of the original intention of NFT issuance, and is not conducive to the long-term development of the market. Secondly, not all NFTs should be paid royalties, NFT projects suspected of "Rug Pulls" should be put on restrictions on royalties theoretically.

Good Practices and Future Trends

1. OpenSea's innovation in royalty contracts should be supported.
   In the short term, arbitrary changes in royalties by NFT platforms can cause a periodical impact on artists. For project parties and artists who are not ready to take on new challenges, using contracts made by OpenSea can guarantee their income to a certain extent.

2. There is more than one way to cut down royalties.
   Traders will definitely try more measures to reduce royalties. To some extent, the trader and the creator have conflicts of interest, so in addition to the royalty, the creator should actively make other attempts at monetization.

   2.1 For NFT projects, it's all about fairness.

   When collectors make money, creators should also make money.

   • Reserve 10% of NFT in the Treasury when issuing it. When the NFT price rises to a certain extent, it can be sold for cash in the market.

   • Retain the brand IP rights of NFT and actively participate in the market operation and commercial realization.

   2.2 For NFT platforms, refined operations are necessary.

   • First, for the development of PFP projects, the royalty reform may move from partial reliance on royalties to no reliance on royalties to achieve a "soft landing".

   • Second, for artistic projects, it is reasonable to pay royalties for the NFT in order to support the creation of artists.

   • Third, for a tool type NFT, which is essentially consumer goods rather than collectibles, the volume of its royalty is small and will be gradually replaced by subscription fees or buyout fees, which will change the business model.

   The current NFT royalty reform may be the watershed of the NFT business model evolving to a better state. The future development has the following trends:

   • The business model will be more abundant, and quality supply will increase.

   • NFT integrated royalty contract will be launched. Some NFT projects with mandatory royalties will adopt new contracts.

   • Zero-royalty projects will form the long-tail market of the NFT industry.

3. Possible directions to try in the future
   Beyond all the disputes around NFT royalties, we believe the methods below are worth a try.

   • Experiments on incentive royalty, say, the percentage of royalties decreases over the time one holds an NFT. Or the higher the base price, the lower the royalty.

   • Besides creators, the best thing a platform could do is to get people to pay royalties. Like Blur’s incentive, or any other form of incentive.

   That's what we think about NFT royalties. Welcome to follow us on Twitter, join the Discord community, leave your comments and tell us your opinions.

About Oases

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