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Magic Eden Adopts Optional Royalties, Sparks Debate in NFT Space

Magic Eden has recently allowed optional royalties on its platforms. This article explains their reasons, community sentiments and consequences of the move.

Et Tu, Magic Eden?

Magic Eden has long honored and pushed for the protection of creator royalties, often acting as a lead critic of NFT marketplaces that adopted optional royalties. Then, Magic Eden recently reversed itself and adopted its own optional royalties policy. Why?

On Sept 13., Magic Eden, the leading NFT Marketplace on Solana, announced the launch of Metashield, an NFT tool designed to help protect creator royalties.

Features of Metashield include preventing Non-Fungible Tokens (NFTs) from being listed on specific marketplaces (those that support optional royalties), changing the NFT’s metadata, blurring or watermarking the image of the NFT until the royalties are paid, and even calculating the total debt accumulated by those who dodge paying royalties.

Magic Eden championed protecting creator royalties, saying that “the hardest worker creators get punished on zero royalty marketplaces.”

On Oct. 13, Magic Eden announced their collaboration with Coral Cube, a marketplace and aggregator that allows optional royalties.

They clarified through a Tweet (later deleted) that they are not adopting optional royalties but “joining forces” with Coral Cube.

However, Magic Eden doubled back by announcing a day later that they have decided to adopt an optional royalties policy.

Magic Eden Gives Reasons for Adopting Optional Royalties

Magic Eden justified shifting its stance away from honoring strict creator royalties due to more users choosing not to pay royalties on rival NFT marketplaces like Sudoswap, Yawww, Solanart, and Hadeswap. The number of NFT wallets choosing optional royalties marketplaces has been increasing significantly since July 2022.

Graph of cumulative wallets choosing optional royalties marketplaces.

Currently, it is impossible to enforce royalties on a protocol level; while smart contracts can have royalties built into them, marketplaces can still code around them to avoid the royalties. This is somewhat counterintuitive to the common understanding of blockchain technology; that smart contracts and transactions should be immutable. Ultimately, it is up to the marketplace whether they want to enforce paying royalties or not.

If Magic Eden continues enforcing royalties, it will eventually lose out to marketplaces with optional royalties. Since sellers on such marketplaces do not need to pay the extra 7.5% to 10% of fees, they can list their NFTs for a lower price than marketplaces with enforced royalties. Buyers, too, would prefer to purchase from these marketplaces due to the lower selling prices of NFTs.

Ultimately, traders benefit from optional royalties, while creators suffer the consequence.

Reaction to Move by Magic Eden

The pivot by Magic Eden has received mixed opinions from the NFT community. Creators, traders, and developers have voiced their displeasure on various common NFT communication channels, while others chose to remain diplomatic.

Solana NFT marketplace Exchange Art tweeted, “At an alarming rate, platforms have decided to treat artists as [a Stock Keeping Unit] instead of people. Royalties exist for a reason, and creators shouldn't be worrying about being listed on sites that dismiss their rights. This is not acceptable, and we'll simply not going to tolerate it.”

Exchange Art even developed an OPT-IN mechanism to prevent users from trading NFTs on other platforms; thus guaranteeing creators receive royalties.

The pseudonymous co-founder of Deadfellaz, Betty, tweeted that this move would “disempower smaller creators from self-starting without the massive advantages those who are funded and well connected already have.”

A Washington, D.C.-based attorney going by the Twitter handle RickiCryptoStix wrote a Twitter thread that likened paying zero royalties to over-fishing and pollution. He explained that without central intervention, fishermen will over-fish, and manufacturers will use the cheapest environmentally harmful methods for production. However, he says that a central body cannot enforce royalties but must be socially engineered; similar to how it is a social opprobrium to eschew tipping in the U.S. or not wearing masks in Japan. He even proposes ways to enforce such social norms by identifying royalty dodgers using bots.

Creator of the NFT “Everydays: the First 5000 Days,” the industry heavyweight Beeple, chose to remain diplomatic about the matter. He said that while he supports royalties, it is more sustainable to have a buyer’s premium, compared to a seller’s fee. This is because buyers are more encouraged to pay a premium to enter a project they believe in.

A Consequence of Magic Eden’s Dominance

To some degree, Magic Eden only has itself to blame that other NFT marketplaces are adopting optional royalties. For one, they have little choice because Magic Eden possesses the dominant share of the market.

Magic Eden has more than 86% of the total Solana NFT trading volume since Oct 25. Image Source: Tiexo

Also, Magic Eden has aggressively marketed botted NFT projects like Shrouded Playground, Degentown, Okay Bears, and Kings of da Street. This earned them a truckload of platform royalties; this turned royalties into a scapegoat and made it seem like royalties are the problem.

Are Hadeswap and Solanart subtly pointing a finger (or two) at Magic Eden? Image Source: Twitter.

Since Hadeswap and Solanart have adopted 0% platform fees and 0% creator royalty fees, they have taken subtle jabs at Magic Eden via Twitter, saying things like “Give all fees back to the people” and “This time YOU choose what’s fair.”

Compensation for Creators

While Magic Eden has embarked on the path of optional royalties, they came to this difficult decision after extensive rumination.

To continue supporting creators, they plan to launch a $1 million Creator Monetization Hackathon. This hackathon seeks to develop pro-royalty and alternative monetization tools.

For a start, when it comes to paying royalties on Magic Eden’s platform, instead of the typical creator’s fee applied to users selling their NFTs, this fee will be passed on to the buyer but with the option to choose whether to pay or not. Also, the default option will still be to pay full royalties.

One monetization tool for creators that Magic Eden is coming up with is Boots, an NFT upgrade service. Creators can use Boots to charge a fee to buyers to add new traits to their existing NFTs.

However, can this kind of monetization method (charging a fee for upgrading traits) completely compensate for the lack of royalties? Upgradeable traits have been a free feature used by some projects like Edd Fox. NFT owners will not want to pay for upgrading their NFTs’ traits after paying for their NFTs.

A nascent NFT marketplace, Blur.io, also provides traders with optional royalties. However, they have a system for incentivizing traders to honor royalties by providing larger and rarer airdrops.

Why Are Creator Royalties Necessary?

Frank, the founder of the Solana NFT DeGods, said that NFT royalties aren’t a moral prerogative, but rather are the best economic method to benefit both creators and holders.

Dccockfoster, the co-founder of Nifty Gateway, compared paying royalties to paying taxes, tweeting that “given the option, most people would opt out of paying taxes. Same with royalties - it's just human nature.”

Imagine the chaos that would ensue if citizens have the choice of whether to pay taxes or not. The government will not have enough funds to build essential infrastructures like roads, hospitals, schools, and other amenities.

Likewise, without royalties, creators will have no incentive and funds to continue building on a project after it has been minted. There will be no reason to have a limited supply of NFTs per collection; creators will only want to sell you more NFTs through mints. It is also meaningless for creators to find ways to pump the floor price after the mint. Why would the project team even want to stick around and maintain the grassroots of their Discord community after their NFTs have been minted out since they have already “collected their funds”? In other words, users will see more rug pulls.

Royalties fuel the existence of all the things we love about NFTs, such as free mints, airdrops, de-rugs, low mint prices, and having an active community with constant interactions from the project team. Without royalties, all these “freebies” will cease to exist, and we can even expect to pay more during mints.

Royalties form a huge portion of income for creative industries like music, film, comics, art, books, audio, podcasts, etc. Artists will avoid entering the NFT space, knowing they will receive no royalties once their work is complete.

How About Alternative Revenue Streams?

Advocates of zero royalties will argue that creators can seek alternative revenue streams instead of depending on royalties. However, will alternative revenue streams provide the impetus for creators to provide the same value to an NFT project as we see today when royalties are in place?

Besides royalties, the current “main source” of revenue for most NFT projects is the mint. A project mint is more like a fundraiser in a Kickstart project to continue building the project.

Alternative revenue streams cannot be shared with NFT holders and do not incentivize creators to raise the floor price of NFTs. This does not bode well for NFT traders whose paramount reason for entering an NFT project is to sell the NFT for a higher price.

Furthermore, advocating alternative revenue streams and monetization tools like Magic Eden’s Boots will only provide more justification for zero royalties.

Conclusion

While we understand the importance of royalties and how it is essential for the ongoing development of NFT projects, we live in a selfish world where traders would avoid paying royalties if given a choice, and marketplaces want a greater share of trading volume. Furthermore, there is no way to enforce royalties in smart contracts technologically, hence going down the path toward zero royalties seems unavoidable.

NFT stakeholders should keep an open mind and find other possible means to succeed in future NFT projects. We might eventually stop seeing the proven meta of free mints and airdrops. Still, it also means an opportunity for projects to explore new methods and utilities to get people to invest.

The NFT industry develops at a lightning-face pace; project teams either move with the times or get left behind. Methods that used to work profitably for traders a year ago such as grinding for whitelists in NFT projects no longer work.

Even when NFT projects fail, the experience gained by the team is still invaluable in building the next profitable blockchain dApp. Early adopters and pioneers will learn from their mistakes and be a valuable source of knowledge for others looking to enter the Web3 space.

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