The Ultimate Guide to NFT Royalties and NFT Marketplaces in 2023
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The Ultimate Guide to NFT Royalties and NFT Marketplaces in 2023

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1 year ago

An overview of the current state of NFT marketplaces, and how the debate over NFT creator royalties are dividing the space.

The Ultimate Guide to NFT Royalties and NFT Marketplaces in 2023

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The party in the non-fungible token (NFT) market is over. Everyone understood they should have sold their rock JPEGs and colored monkeys for millions while they could.

Right?

Wrong!

NFTs are stuck in a rut, but they are not over. As the deep dive into fashion and luxury NFTs showed, NFTs are here to stay. But, the NFT creator royalty debate is changing the market. And the NFT marketplace landscape is changing significantly. That is why this article covers:
  • A brief overview of the NFT market in 2023.
  • NFT royalties and how they are changing.
  • An analysis of the most popular NFT marketplaces.

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Are NFTs Dead? A 2023 NFT Market Overview

NFTs started 2022 strong. Then they ran over a cliff.

A graph about NFT trading volumes says more than a thousand words in this case:

Source: The Block

After liquidity dried up in the second half of 2022, the NFT market underwent a painful consolidation phase. Part of that was a massive dropoff in NFT mints on Ethereum. Meanwhile, Solana NFT mints remained fairly stable, albeit on a lower level.

Also read: How to Mint an NFT

Source: The Block

The temporary September spike in Solana NFT mints was due to the launch of y00ts, a new NFT collection. Solana established itself as a respectable competitor to Ethereum and has cemented its position in second for NFT collecting and trading currently.

At the same time, NFTs as a whole remain in the shadow of DeFi when it comes to trading volumes:

Source: The Block

The sector looks on a recovery path in 2023, with a slight uptick in volumes propelled by better market sentiment. But make no mistake, there are still major issues to be addressed:
  • The unresolved question of NFT creator royalties.
  • Increasing competition among marketplaces, fueled by a dog-eat-dog mentality and undercutting tactics.
  • Unknown unknowns concerning the sector's use case and distribution mechanism in the future.

Creator royalties have kept the NFT space on its toes in the last few months. But what are they, and why are they so important?

What Are NFT Royalties and How Do They Work?

NFT royalties allow artists and content creators to earn money on their digital creations. Royalties are a small cut of the revenue of each NFT sale. The royalty fee, usually between 3% and 10%, goes directly to the artist — which they set at the beginning. The NFT's smart contract will automatically collect and pay out the royalty upon every sale. Thus, artists benefit from the trading volume of their creations and do not rely on a one-time revenue at launch.

Benefits and Disadvantages of NFT Royalties

Creators can earn a passive income from NFT royalties. In fact, they benefit more from how engaged their community is and how much trading volume the creation generates. Thus, NFTs also incentivize creators to build sustainable and long-term communities around their NFTs.
However, NFTs are a fragmented market without property rights protection. Collections can be copied or spin-offs of original collections on other blockchains can diminish the value of the original. Moreover, NFTs are highly volatile. Creators cannot count on a stable income stream from NFT royalties. Finally, creators are at the mercy of traders and NFT marketplaces to enforce royalties. The next section explains how NFT marketplaces undercut each other by cutting creator royalties.

NFT Creator Royalties: A Battleground

As a consequence of the 2022 market crash, NFT marketplaces have started reducing royalty fees to near zero. In a cut-throat market environment, it's every marketplace for itself. Sudoswap was the first to lower royalty fees, and other marketplaces like X2Y2 and Blur followed with optional fees. Effective royalty fees for major NFT collections have fallen off a cliff:

Source: Dune

Royalties can be enforced on-chain, but nothing stops marketplaces from deactivating royalties — a race to the bottom ensues. Traders that buy and sell NFTs for price speculation would prefer not to pay royalties if they don't have to, whereas NFT art collectors would be more likely to pay to support the artists.

The exception to this rule: OpenSea.

It doubled down on its commitment to enforce royalties. OpenSea does so with a tool that allows creators to blacklist marketplaces that don’t enforce royalties. The tool works as a simple code snippet, which adds the functionality to new smart contracts and existing upgradeable ones.
This Operator Filter Registry is a code snippet collections can add, which enforces royalties on EVM chains and blocks sales on platforms with optional royalties.

The upside?

Other marketplaces followed suit. Blur came out with token incentives that disproportionately reward traders voluntarily honoring royalties. X2Y2 also reintroduced mandatory royalties. This led to a slight rebound in royalty fees to 0.4% on the platform, according to a report by The Block. However, this is still considerably below the pre-optional-fees era, indicating that it might be more of a quick fix than a structural shift.
Unfortunately, there is no optimal solution for the royalty conundrum. Since Ethereum is permissionless, enforcing royalties via a market-leading exchange setting a policy means sacrificing decentralization. This implies the NFT isn't really yours if you cannot sell it wherever you choose to.
NFT collections will continue looking into alternative revenue sources like protocol-owned liquidity and connecting NFTs to physical goods to shield themselves from the risks of getting shut out of royalties.

The Role of NFT Royalties for NFT Marketplaces

Removing royalties is not merely an act of generosity or solidarity. It can have a profound impact on the scene as a whole. Without royalties, creators may feel disincentivized from producing new collections since their projected revenue drops. Even though a creator cannot exactly project their revenue from a new launch, simple logic dictates that artists rely solely on a strong launch without revenue from secondary sales.
Alternatively, creators may choose to boycott marketplaces that treat them unfairly, adding to the fragmentation of the market. Users would have to dig even deeper to find selected NFT collections that are not trading on all marketplaces.
Therefore, enforcing royalties either via social norms or via technology benefits creators at the expense of traders.

But why do marketplaces remove them in the first place?

Why Marketplaces Remove Royalties

OpenSea has become the biggest marketplace because it successfully aggregated the supply of NFTs. By design, the NFT space is decentralized and needs a centralized marketplace solution to facilitate trading. Thanks to OpenSea’s first-mover advantage, it also aggregated demand, meaning not only do creators list their collection on OpenSea, but traders also regard it as their go-to option.
Since the supply of NFTs is literally non-fungible, it's easier for new marketplaces to gain a foothold. Moreover, buyers and sellers are fragmented due to the market's decentralized nature. That led new marketplaces to step in with features like analytics, tools and incentivization tactics like airdrops. Blur has had particular success with that by promising power users an airdrop and removing marketplace fees.
Consequently, aggregators emerged, causing marketplaces to compete on price. And in a bear market, where traders generate fees, but creators do not, marketplaces will keep traders happy. The result: royalty fees drop.

An Overview of the Top NFT Marketplaces

OpenSea remains the top NFT marketplace in terms of users and sales. However, Blur has managed to overtake OpenSea in NFT trading volume. However, it is hard to assess how much of that is legitimate trading and how much wash trading:

Source: dune.com

On Solana, Magic Eden has retained a dominant position and is pretty much the only NFT marketplace in town:

Source: The Block

It is worth taking a look at the major NFT marketplaces individually to analyze their position on creator royalties.

Top Ethereum NFT marketplaces

The most popular NFT marketplaces on Ethereum are:

  • OpenSea
  • Blur
  • X2Y2
  • LooksRare
  • Rarible

OpenSea

OpenSea is the first Ethereum NFT exchange. It remains the largest today, although its position is increasingly challenged. OpenSea supports NFT creators by enforcing royalties on all existing collections. Its dominant market position forced other marketplaces to follow suit.

View post on Twitter

EDITOR’S NOTE:

A few days after this article was published, OpenSea did a classic 180 and slashed royalty fees to basically 0. OpenSea’s rationale can be pretty much summed up with “we tried our best, but everyone’s doing it and we don’t want to go out of business.” The market leader is clearly feeling the heat from the Blur airdrop and scrambling to defend its position.
View post on Twitter

Blur

Blur is the biggest competitor to OpenSea, due a massive airdrop in 2023. It has overtaken OpenSea in some regards, although the veracity of its trading volume cannot be independently confirmed. Blur initially did not support royalty fees but changed its position going into 2023:

View post on Twitter
The highly anticipated BLUR token went live on Feb. 15, 2023, with 360 million, worth around $399M at the time of writing, airdropped to the top users of the platform. The token surged to a high of around $5 since launching, however, it has since fallen by over 77%. Since launching in October last year, Blur saw over $1.18B in trading volume on the platform, with over 146K unique users.
View post on Twitter

X2Y2

X2Y2 is another strong challenger to OpenSea. It had to follow OpenSea’s policy on royalty fees and reinstated them a week later:

View post on Twitter

LooksRare

LooksRare is another popular NFT marketplace with its own token called LOOKS. LooksRare initially generated a lot of traction upon launch but has tailed off slightly since. It does no longer support creator royalties, but shares 25% of the protocol fees with creators or collection owners. In its new royalty policy, LooksRare announced that buyers can voluntarily choose to pay creators a fee at checkout.

Rarible

Rarible launched in 2020 and has its own RARI governance token. One of its features is that buyers can use a filter to explore the top influencers and artists on the page. Rarible also honors royalty fees and implements several types of royalties with EIP-2981. You can find the entire Rarible royalty fee policy here.

Top Solana NFT Marketplaces

The top Solana NFT marketplaces are:

  • Magic Eden
  • Solanart
  • Hadeswap

Magic Eden

Magic Eden is the top Solana NFT marketplace. It also launched on Ethereum, although its trading volume is much higher on Solana. Magic Eden supports royalty fees through a protocol-level royalty protection:

View post on Twitter

Solanart

Solanart is one of the strongest competitors in the Solana NFT space. However it does not enforce royalty fees:

View post on Twitter

Hadeswap

Hadeswap is an upcoming challenger with its own HADES token. It employs an NFT AMM, meaning traders trade against a liquidity pool. It has a 5% optional royalty fee.
View post on Twitter

Outlook for NFT Marketplaces

The NFT space is one of the quickest-moving niches in crypto. Trends can last mere months or weeks. However, vertical marketplaces are a trend to keep an eye on in 2023
That is, marketplaces, which focus on specific verticals like PFPs, metaverse land, art and fashion. These sub-niches have different types of buyers, and strong vertical communities can provide better user experiences and take away market share from the incumbents. The winning marketplace makes its buyers and sellers meaningfully happier than any substitute. Since no marketplace managed to do completely that so far, vertical marketplaces could become a thing.
Moreover, brands may create their own marketplaces and deal with supporting creators themselves. This would also allow brands and communities to take control of their economy. By setting fees, royalties and creating utility for a native token, brands can build up loyalty that marketplaces and aggregators struggle with.
Still, big marketplaces are not going anywhere. OpenSea has a strong brand recognition, Blur is making a splash with massive token incentives and other marketplaces are chipping away at the market share. Marketplaces provide economies of scale that smaller verticals cannot compete with.

Conclusion

The future for NFTs may be uncertain but definitely exciting.

There are almost too many potential use cases that need to be put to the test. We didn’t even talk about storytelling NFTs, generative art, physical items linked to NFTs, and the overlap with other sectors like gaming.

It will most likely be a year of consolidation for the sector, as the entire industry recovers from the bear market. Expect a consensus on royalties and marketplace leaders to emerge. The one trend to watch will be vertical and thematic marketplaces.
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