NFT Platforms Criticized for Decreasing Artists’ Royalty Rates

**Tension between Traders and Creators of Digital Collectibles Intensifies Amid NFT Market Slump**

**Introduction**

The market for nonfungible tokens (NFTs) is currently experiencing a significant downturn, leading to increased friction between traders and creators of digital collectibles. This tension arises from the actions taken by major NFT exchanges Blur and OpenSea, who have reduced the royalty rates payable to artists when ownership of a token changes. While the exchanges hope that lowering costs will stimulate buying and selling, the reduction in artist income could stifle new work and solidify a market that has already seen a 95% decrease in trading volumes since January 2022. In this article, we will explore the impact of these developments and their implications for the future of NFTs.

**The Implications of Reduced Royalty Rates**

Diminished artist income resulting from the reduction in royalty rates could have detrimental effects on the NFT market. Trading volumes in the market have already significantly declined, falling from $17 billion in January 2022 to just $4.3 million in July of the same year. The rates paid to artists dropped from as much as 5% per transaction to 0.6%, leading to a decline in royalties from $269 million in January to $4.3 million in July. Researcher Nansen warns that this shortsighted strategy neglects the delicate balance needed to empower both traders and creators, which is essential for the sustainable success of the NFT space.

**The Rise and Fall of NFT Royalties**

NFT royalties reached a peak of $1.5 billion between August 2021 and May 2022, driven by the popularity of collections like Yuga Labs Inc.’s Bored Ape Yacht Club. However, the market took a downturn when the effects of the pandemic-era stimulus began to wane. The launch of Blur in October further disrupted the market by incentivizing trading through lower royalty rates. Blur now holds over 70% of daily volume on the Ethereum blockchain, according to Dune Analytics. As Blur’s success grew, OpenSea, the marketplace it supplanted, felt compelled to follow suit.

**The Financialization of NFTs**

The introduction of Blur marked the increasing financialization of NFTs. As a result, some skeptics view the earlier popularity of digital collectibles as a passing fad. However, artists like Beeple (Michael Winkelmann), known for his NFT “Everydays” that fetched $69.3 million in 2021, believe that the sector will experience a resurgence. Others argue that royalty rates should be encoded in the software governing NFTs to prevent exchanges from adjusting them. Marketplaces like SuperRare and Art Blocks enforce these payout regulations.

**The Importance of Code in NFT Governance**

Chris Akhavan, chief gaming officer at NFT marketplace Magic Eden, emphasizes the importance of governing NFT rules through code rather than relying solely on social norms. This approach ensures greater transparency and consistency in royalty rates and artist payouts. Shiva Rajaraman, Chief Business Officer of OpenSea, suggests exploring new opportunities for creators to engage with their communities and generate income beyond traditional creator fees. For example, linking NFTs to merchandise sales could provide ongoing support for artists.

**The Impact on Artists and the NFT Community**

Artist Matt Kane, whose NFT “Right Place & Right Time” sold for over $100,000 in 2020, expresses concern over a decline in artist engagement due to reduced royalties. He believes that the quality and diversity of NFTs will suffer if creators are not adequately compensated. While some collectors manually send him royalties on non-enforcing platforms, others do not adopt the same approach. Kane stresses the importance of a non-zero-sum economy, where one person’s success benefits everyone, and emphasizes the need to avoid regressing into a zero-sum economy where one person’s gain comes at another’s expense.

**Conclusion**

The tension between traders and creators of digital collectibles in the NFT market is increasing due to the reduction in royalty rates. While the exchanges hope that decreased costs will stimulate buying and selling, the decline in artist income raises concerns about the future of the market. The financialization of NFTs and the need for proper governance through code rather than relying on social norms are also important considerations. The impact of these developments on artists and the NFT community is significant and requires careful navigation to ensure the long-term success and sustainability of the NFT market.