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Making money passively is a dream for many. But with the advent of NFTs and blockchain technology, this dream has also become a reality for several digital artists. Digital art like NFTs is not only sold for astronomical sums, but artists can still earn from their creation years later. How? By awarding royalties to their work, they receive a certain percentage on each sale.
But what happens to NFT trading in a bear market? Several NFT marketplaces including MagicEden decided to waive their royalties. With all its consequences.
To fully understand what’s happening, let’s go back to the start. What are NFTs? These non-fungible tokens are unique digital assets that exist on the blockchain. They come with a digital proof of ownership. In other words, anyone can see who is the creator of the NFTs and who is the rightful owner. This digital proof of ownership also exists on the blockchain. Transparent and accessible to everyone. And thanks to the decentralized nature, the creator also has complete freedom to make whatever he wants. For example, an NFT can be anything, as long as it is unique and exists on the blockchain:
An important part of the sale of these NFTs are royalties. Thus, the creator of this NFT gets a certain percentage on each sale. This way, as a creator, you can still make money with your digital art years later, even after the sale. This usually varies between 5% and 10%. Creators determine this percentage themselves, which also gives them complete freedom. These royalties are also seen as a way to protect the creator and reward them for their creative designs.
Example: you sell a painting for a democratic price of 100 dollars. A few years later, your work turns out to be extremely popular with the general public. The owner decides to sell your work for no less than 100,000 dollars. That’s a nice yield for the owner, but what about you, the creator? In order to continue to reward the digital artist for his/her work, royalties have been created.
NFTs are not new and we have been trading this digital art for years without any problems, but guess what? Even though NFTs, including the digital proof of ownership, are recorded on the blockchain, we cannot enforce these royalties from the source code. In other words, as an owner you can say that you want royalties on your work. Despite this information being included in the smart contract, marketplaces can encode around it and thus allow people to buy or sell NFTs without paying royalties to the creator. There is therefore no certainty that you will actually receive this percentage with a secondary sale.
There are several layer1 blockchains in the current landscape, the most famous of which is the Ethereum network. NFTs can therefore be built on different blockchains. They all have their own characteristics and their own marketplaces. Most popular NFT marketplaces include:
They all focus on a different blockchain, OpenSea focuses on Ethereum and you can mainly buy Solana NFTs on MagicEden. But what is the revenue model of these marketplaces? How can they exist?
Not only the creators use royalties. With every sale on the platform, the NFT marketplace also takes a certain royalty. This is usually 2%. In this way, NFT marketplaces can also continue to exist and have a healthy revenue model.
The relationship between creators, marketplaces and traders is under pressure. Digital artists want to keep their royalties and their source of income, with NFT marketplaces taking off with 2% of the transaction. Traders, on the other hand, are not waiting for this. They naturally want to buy their favorite NFT at the cheapest price. Traders benefit little from these royalties.
Logically, they look for the cheapest option for them, which is not so much the best option for the creator or the marketplaces. If we look at 10% creator royalties and an additional 2% marketplace royalties, these amounts can add up to thousands of dollars. An expensive business for a trader, and even decisive for whether or not to make a purchase. And this tense relationship recently took a drastic turn thanks to the bear market.
The whole NFT world was looking in amazement when earlier 2022 MagicEden, one of the biggest NFT marketplaces on Solana, among others, decided to remove all royalties from their NFT marketplaces. Due to the bear market, trading in NFTs also declined dramatically. In addition, fewer and fewer traders were willing to pay the royalties. In fact, traders were already able to circumvent these royalties on smaller marketplaces. After all, why would you pay extra? Hoping to boost this trade again, all royalties were scrapped at Magic Eden.
Specific? Traders can buy their favorite NFT at more competitive rates, but the maker? He loses all his secondary income. And MagicEden also consciously chooses to make royalties optional on their platform. As a creator, this choice is very difficult.
An important indicator for NFT traders is trading volume. They look at the popularity of a particular NFT collection to estimate supply and demand. Only in this way will they know whether there is sufficient demand to further sell this NFT at a profit. But what happens now?
Now that there are no more royalties or marketplace royalties, we see NFT owners selling their own NFTs. To himself, of course. They have multiple software wallets such as MetaMask or Phantom Wallet and are constantly selling their NFT to themselves. This increases the trading volume, making it seem like there is a lot of trading and interest in a particular NFT or NFT collection. The trading fees on Solana’s blockchain are negligible, unlike Ethereum.
Despite MagicEden being under pressure and critics also questioning the future of Solana NFTs, it’s been pretty quiet on the neighbours’ side. NFTs on other layer1 blockchains still rely on royalties, and remarkably, there is little friction there, at the time of writing.
Does Solana open Pandora’s box in terms of royalties and NFTs? The fact that these royalties cannot be recorded on the blockchain is a problem that occurs with every blockchain. Will giants like OpenSea, Rarible and NBA Top Shot soon be removing their royalties as well? And how will the masses, especially the creators, react to this? And what is their (financial) future?
NFTs are not only a new form of digital art, but also an important source of income. Digitization is the future, but the fact that artists could earn a certain percentage on every secondary sale? That is more than interesting for many artists to delve into the world of these non-fungible tokens.
Now that these royalties are abolished, or become optional, does this mean a decrease in online creators? Is this a temporary solution or are we saying goodbye to royalties on Solana’s blockchain for good? More importantly, are other NFT marketplaces following this trend? The future will be all-important for the artist, the NFT market palces and the traders.
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