A number of NFT marketplaces have recently made creator royalties optional in order to sell digital tokens at lower prices, directly interfering with one of the core revenue streams for Web3 creators. Without effective workarounds, brands could lose many of the key creative partners leading them into the space.

Experts told Ad Age that with limited options, marketers will have to develop new ways to compensate creators.

“Brands are pretty reliant on creatives and artists [in Web3] ... and I think it is really important for [them] to know what their stances [are] on this issue,” said Billy Huang, co-founder of Web3 agency Insomnia Labs.

Royalties are largely the reason why Web3 is considered a creator-friendly alternative to Web2, where walled gardens maintain control over monetization, as well as the traditional art world. Smart contracts enable royalty fees to be programmed into NFT transactions, so that each time the token changes hands through a sale, the creator receives a small cut of the payment.

Ethereum-based NFT creators have earned nearly $2 billion in royalties to date, according to research from crypto finance firm Galaxy Digital. While just 482 collections account for 80% of this revenue, smaller artists could still see 10 or so resales a year, said Coco, an artist for NFT collective Stardust Society. Multiply each of these sales by the 5% average royalty that OpenSea, the largest secondary marketplace, has historically paid, and income could quickly compound.

Brands including Gucci, Adidas and Time have leveraged royalties as a way to court creators through NFT collaborations. And the practice has become quite lucrative: As of August, Gucci had pulled in $1.5 million in royalties, Adidas nearly $4.7 million and Time just over $3 million, according to data on blockchain analytics platform Dune Analytics. The portion of these royalties that went specifically to creators is unclear.

‘Race to the bottom’ 

The royalty-withholding trend started in August when Sudoswap, a decentralized NFT marketplace that does not honor royalties, began seeing outsized activity from buyers taking advantage of lower prices amid a depressed NFT market. While OpenSea has traditionally levied relatively sizable fees on its tokens, including a 2.5% take for itself on top of the 5% average for creator royalties, Sudoswap charges a flat fee of 0.5%, and nothing more.

Other marketplaces took notice that the low fees were attracting buyers, so they decided to reevaluate their position on royalties. Popular platforms like Magic Eden and LooksRare have since made royalty-related charges optional, as have nicher platforms like X2Y2 and Blur.

The controversial shift came to a head this month when OpenSea publicly refused to say that it would continue honoring royalties. OpenSea received significant backlash, including the cancellation of a drop from famed streetwear brand and NFT regular The Hundreds. It reversed its position four days later and pledged to enforce royalties going forward.

“Marketplaces should not enforce business models for creators, creators should,” an OpenSea spokesperson told Ad Age. “We don’t think a blanket 'creator fees optional' solution is an acceptable one...so we’ve spent the last several weeks brainstorming, debating and exploring more sustainable options that help balance the scales and put more power in the hands of creators."

While a momentary victory, OpenSea’s stance goes against the grain of what creators and experts are calling a “race to the bottom,” whereby all marketplaces could feasibly do away with royalties to compete for market share. In this scenario, creators will have less incentive to take part in NFT projects, including those in partnership with brands.

“I’m really worried for the overall ethos of Web3 because this space was established on the premise that the artists were finally getting paid the royalties that they deserve, and everyone was in agreement with that when they came in,” said co-founder of The Hundreds Bobby Kim, a.k.a Bobby Hundreds. Kim spoke to Ad Age in the four days before OpenSea reversed its position.

Coco, who has previously teamed with jeweler Kendra Scott, anticipates a lack of royalties will deter creators from collaborating on collections they already do not fully control.

“However, I think [it] would ultimately be up to the brands to do the right thing and pay us for our work,” she added.

What brands can do

To maintain relationships with Web3 creators, brands will need to offer assurances.

One way is to fight for royalties by enforcing them at the marketplace level. Royalties cannot be enforced at the blockchain level, meaning whether or not they are honored is up to each individual marketplace. But brands could code their smart contracts to exclude, or “blacklist,” marketplaces known to not honor royalties, thus ensuring that each sale will grant creators a cut.

Blockchain Creative Labs, the Web3 studio of Fox Entertainment, is considering the blacklist option as an alternative for its partners, said president Melody Hildebrandt.

“That is going to be creators and brands making the decision [over] what is going to allow the marketplaces that are with creators to thrive versus the marketplaces that are seeking to serve speculators,” she said.

NFT marketplace OneOf already has bilateral agreements established with other marketplaces like OpenSea and Rarible that allow it to enforce royalties not only on its own platform but with platforms that its token could wind up on, said Co-founder and CEO Lin Dai.

When OpenSea first floated the idea of blacklisting earlier this month, Bobby Kim, among others, took to Twitter to explain that disallowing NFT owners from selling their token on certain marketplaces would not only be anti-competitive but also antithetical to the decentralized vision of Web3.

“OpenSea’s goal is to empower creators with more tools to control their business models," an OpenSea spokesperson told Ad Age. "The marketplace filter that we introduced last week offers an on-chain way for collections to ensure their creator fees are honored —across the NFT ecosystem. It works by preventing transactions on royalty-evading marketplaces, and permitting transactions on all marketplaces that respect creator fees. Creators can choose to use any tool for on-chain enforcement (not just the one we released), and we hope more marketplaces join us in respecting creator fees.”

If brands are hesitant to resort to blacklisting, they could maintain relations with creators by ensuring their compensation through other means. One way is by offering them a higher cut of an NFT’s primary sale, also known as its “mint.” Each mint’s smart contract contains stipulations as to the parties receiving cuts of the sale, and the size of their respective cut. Brands could unilaterally increase creators’ cuts, though that would likely require decreasing the size of their own.

Coco said she would definitely be open to a higher cut of the mint as an alternative to subsequent royalties, as did Hildebrandt. Kim agreed, and posited that such a practice could give way to more drops, meaning more opportunities for consumers, and more revenue for both brands and creators.

That said, there is the possibility that increasing the number of drops could dilute the value of each drop—a particular concern for Web3-native brands with core collections, like Doodles. For various reasons, some brands may not want to increase the number of drops, and in order to reach revenue goals, may not be able to forfeit portions of their cut. This could result in raising the price of the NFT, which would hurt the consumer, said Hildebrandt.

Another option is to pay creators more up front via a contract, which would be separate from the NFT sale. This, of course, would be dependent on the nature of a given partnership, but doing so could assuage creators’ concerns before a collection is even dropped. 

However, a brand may lose out on the benefits of having a partner’s revenue depend on the success of the project.

“Royalties give the artists incentive to continue promoting the collaboration,” Coco said. “If they only get paid up front, that incentive is gone.”