The Non-Fungible Token (NFT) market is witnessing a significant downturn, as tensions escalate between traders and digital collectible creators over disputes concerning royalties.
This contention has stemmed from the recent action by leading NFT exchanges, including Blur and OpenSea, to reduce royalty percentages awarded to artists during a token’s change of ownership.
The rationale for this change is that decreased expenses will stimulate more transactions in a market where trading volumes have plummeted 95% from $17 billion in January 2022, as per a recent Bloomberg report.
Royalties, peaking at $269 million in January, have since shrunken to a mere $4.3 million in July, with rates declining from a high of 5% per transaction to a scant 0.6%.
This drastic reduction in artist revenue might potentially deter the creation of new works, further stagnating a market that has already suffered a significant setback.
The NFT market experienced a prosperous phase from August 2021 to May 2022, with total monthly royalties peaking at $1.5 billion. This was largely driven by the popularity of collections such as Yuga Labs Inc.’s Bored Ape Yacht Club.
However, as the market started to diminish due to the dwindling effects of the pandemic-era stimulus, creator payouts took a hit.
The entrance of Blur in October triggered a significant shift in the NFT market.
By reducing royalty rates, the platform encouraged trading, swiftly capturing over 70% of daily volume on the Ethereum blockchain, as per a Dune Analytics dashboard.
This maneuver exerted pressure on the formerly dominant OpenSea platform to adapt accordingly.
“With the introduction of Blur, NFTs have become increasingly financialized,” remarked Ally Zach, a research analyst at Messari.
The NFT Royalities Dilemma
Some specialists recommend incorporating royalty rates directly into the software that regulates NFTs, instead of permitting exchanges to modify them as fluctuating factors.
Marketplaces such as SuperRare and Art Blocks enforce these payouts.
“As with all elements in web3, rules should ultimately always be governed through code, not by relying on social norms,” stated Chris Akhavan, Chief Gaming Officer at NFT marketplace Magic Eden.
In an interview with Bloomberg, Shiva Rajaraman, Chief Business Officer of OpenSea, underscored the importance of identifying new avenues for creators to interact with their communities and earn a livelihood beyond conventional creator fees.
He proposed associating NFTs with merchandise sales as a potential revenue stream for artists.
However, artist Matt Kane, whose Right Place & Right Time NFT fetched over $100,000 in 2020, cautioned that a decrease in creator engagement, stemming from a decline in the quality and variety of NFTs, would overshadow any short-term increase in trading volumes resulting from reduced transaction costs.
Kane revealed that many of his collectors, being arts patrons, choose to send him additional royalties manually after transactions on non-enforcing platforms.
Nevertheless, this sentiment is not shared by all collectors.
“The promise of this technology is to transition us into a non-zero-sum economy, where one person’s gain equates to a win for many,” stated Kane.
“Currently, we are regressing to a zero-sum situation, where one person’s gain implies another’s loss.”
