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16 November 20223 minute read

NFTs and secondary royalties

The promise of royalties on secondary sales has attracted many artists to non-fungible tokens (NFTs). These royalties can be substantial – Galaxy Insights reported that secondary royalties totaled USD1.8 billion to Ethereum-based NFT collections: USD147,602,791 for Yuga Labs, USD82,015,895 for Art Blocks and USD52,061,077 for Chiru Labs (Azuki). Yet such secondary royalties cannot be implemented automatically with current technology and require action by the relevant platform.

The recent Galaxy Insights report describes the situation as follows: “Due to the technical difficulties in enforcing royalties at the smart contract level, they are instead enforced by NFT marketplaces. In other words, royalties are socially enforced by norms, and marketplaces are effectively choosing to support the ongoing funding of creators by collecting and disbursing royalties on their behalf (similar to tipping). Thus, the majority of NFT marketplaces have implemented bespoke royalty payment solutions in order to entice creators with the promise of ongoing revenue streams.” 

The payment of such royalties has recently become a subject of controversy, with many NFT buyers considering royalties to be unfair. Several exchanges made changes to their commitment to paying secondary royalties from eliminating all payment of secondary royalties to making the payment of secondary royalties “optional” at the discretion of the buyer. Creators have reacted by implementing smart contracts for new projects that “blacklist” certain exchanges that do not pay royalties.

On September 13, Magic Eden, a large NFT trading platform for the Solana blockchain, announced its support for secondary royalties and the launch of MetaShield, a product that could assist NFT developers in enforcing royalties. According to Magic Eden, “MetaShield identifies NFTs listed/traded on marketplaces that bypass creator royalties. Creators can ‘shield’ or take actions as they see fit like updating metadata, flagging the NFT, or blurring the image.” Yet, one month later on October 15, Magic Eden announced that it was making payment of secondary royalties optional. 

OpenSea, which holds about 80 percent market share in NFT trading, did not become involved in the controversy until November 5 when it announced in a Twitter thread its policy:  OpenSea (i) understands the importance of secondary royalties to creators, (ii) makes available a tool for creators of new projects to include in their smart contracts to “blacklist” certain exchanges and (iii) has not decided on a policy for royalty payments for existing projects and would decide by December 8.

After a storm of criticism from creators, OpenSea announced four days later that it would continue to pay royalties on existing collections. However, they noted that buyers could still move to other platforms that do not enforce royalties.

Although developer groups are working on technical solutions to the problem, they do not appear to be imminent.  This debate is likely to continue for some time. 

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