Race to the bottom: Will NFT creator royalties become a blur?

  • We were too quick to conclude that the controversy over “Zero Royalties” marketplaces had ended with the announcements of X2Y2 and Blur that they will be enforcing creator royalties in sales of NFTs on their marketplaces. (Click to see our prior article.) It’s clear now that those policy changes have still left a gaping Loophole to the payment of creator royalties affecting already existing NFTs.

What are Zero Royalties policies?

  • Zero Royalties” policies are controversial because they enable people to unilaterally avoid paying the royalties sought by creators, without the creators’ consent. These “Zero Royalties” policies posed the greatest existential threat to Web3.
  • On November 9, OpenSea showed leadership in this space and recommitted to enforcing creator royalties for existing NFTs, and created a new “OperatorFilter” technological measure that can be used for new NFTs to prevent sales on “Zero Royalties” marketplaces.
  • Some “Zero Royalties” marketplaces, including X2Y2 and Blur, then stated they will enforce creator royalties (to respond to OpenSea’s implementation of the technological measure “OperatorFilter“).

The Loophole to Creator Royalties

  • OpenSea’s policy was an important statement in favor of its continued enforcement of creator royalties, but the technological solution of OperatorFilter applies only to new NFT collections that include the code. OpenSea still enforces creator royalties for prior NFT collections, with already existing smart contracts, but those can be easily circumvented. OpenSea can’t collect royalties for sales on “Zero Royalties” marketplaces, much less stop those transactions. That’s what created the whole controversy over “Zero Royalties” marketplaces in the first place.
  • X2Y2’s and Blur’s new policies for creator royalties also applies to only new collections that opt in.
  • This situation creates a major Loophole: it’s still easy to avoid paying creator royalties for existing NFTs by selling them on marketplaces that don’t collect them.
  • According to the separate analysis of Beetle (@1kbeetlejuice) and NFTstatistics.eth (@punk9059), for 9 leading blue-chip NFT collections, including BAYC, MAYC, Moonbirds, Azuki, and Doodles, the marketplace Blur has dramatically increased its marketshare of sales, even besting OpenSea. For example, on Dec. 5, Blur had 67% of sales, while OpenSea had only 24%.
  • As Blur’s marketshare for secondary sales of blue-chip NFTs has increased starting on October 17, 2022, the effective royalty rate (“effective royalty rate = total royalties earned / total volume transacted”) paid for the 9 blue-chip NFT collections has decreased, going from 2.6% (already down from 4.7% in July) to 1.06% on Dec. 6, 2022.

Why the Loophole matters

  • The Loophole matters because most NFT collections were created before November 2022, meaning that most NFT collections cannot easily avoid the Loophole. The crypto winter makes the situation worse. NFT collections that receive an effective royalty of 1% will be hard pressed to build out their roadmaps. Individual artists may face even more difficult challenges if their royalties are circumvented through this Loophole.