Navigating a Low-Royalty NFT Economy

24 Jan 2024

Navigating a Low-Royalty NFT Economy

Elevated Trading Frequency and Enhanced Capital Efficiency

The transition away from an expansive creator royalties environment towards negligible or zero marketplace fees and royalties has come with multiple challenges and left NFT collections scrambling. While royalties were a pivotal (and extremely easy) source of income for NFT projects, the move away from royalties fosters a more vibrant trading environment, marked by increased volumes, tighter spreads, trading frequency, and liquidity. 

This evolution is characterized by several key developments:

Trading Volume Has Pivoted to Lower Fee Marketplaces: Yes, Blur’s volume has been blatantly embellished due to their airdrop incentives, but traders will continue to capitalize on the reduced fees. This allows traders and farmers to execute more frequent transactions as we witness a sustained upsurge in trading activity on collections where royalties are optional. 

Figure 1: Royalty Fees (Per Collection)

Figure 2: Weekly Volume- Blur Marketplace VS OpenSea

Comparing trading volumes between the only two major NFT marketplaces (Opensea and Blur) is difficult to establish any conclusive verdict, but we can deduce a couple of things: 

  1. Incentivized liquidity has not worked out as originally planned. Initially bids were thought to play as limit orders for NFTs, and instead have become a way to flex TVL and gain Blur points. This incentivized liquidity has no interest:

    1. In holding these assets long-term

    2. Nor pay marketplace fees OR creator royalties

  2. While Blur has managed to dominate the volume game, Opensea has managed to retain more users than Blur every week since Blur’s launch. Opensea’s 2.5% marketplace fee also hasn’t diminished its user base either. That said, Opensea’s marketplace fee is negligible due to the majority of volume flowing through Blur.

    Figure 3: Markeplace Fees (Volume)

    Figure 4: Weekly Users (Since Blur Launched)

    We have also seen that incentives work both ways. Creator royalties do not inhibit volume IF there is a big enough incentive to trade the NFT collection. This volume will be much more authentic because farmers have no interest in losing the percentage, but it only works if there is an incentive to trade the asset (ex: upcoming airdrop or token).

    Figure 5: Royalties Earned Since Oct 1 (USD)

Enhanced Capital Efficiency: Reduced transaction costs directly translate into improved capital efficiency. Traders can allocate more of their capital into assets rather than expenditure on fees, potentially leading to greater investment in the NFT space and stimulating market growth.

Innovative Revenue Streams: The dwindling reliance on royalties has prompted collections (some better than others)  to venture into alternative economic models that could yield continuous revenue, such as:

  • Elevated mint prices OR withholding a percentage of the total supply.

  • Revenue generation through collection-owned liquidity pools and transaction fees. We are seeing this occur on NFT AMMs like Caviar and SudoSwap (indicated by ‘COL’ sticker in Figure 6).

Strategic partnerships and collaborations that open new revenue channels, whether that be media deals or retail products.

Figure 6: Revenue Generation through COL Liquidity Pools

The Strategic Role of Collection-Owned Liquidity (COL)

The concept of Collection-Owned Liquidity (COL) stands as a paradigm shift wherein collections proactively establish liquidity pools for their NFTs, fostering a self-reliant financial ecosystem. This movement heralds advantages and strategic implications, but it does not come without risk:

  • Creation of Perpetual Revenue: Collections that leverage their assets to fuel liquidity pools can create a continuous revenue stream through the accrual of transaction fees, bolstering their financial independence.

  • Calculated Risk-Taking: While this strategy entails inherent risks, such as the potential devaluation of assets and impermanent loss, the upside potential is significant. Strategic management and market analysis can mitigate risks and maximize returns. 

While there is inherent risk in putting money on the line, there are some collections that are doing this at a large scale. Both Sappy Seals and Milady (remiliacollective.eth wallet in Figure 8) have put treasury funds on the line to fund their own ‘Collection-Owned Liquidity’ and have had success:

Figure 7: Sappy Seals COL

Figure 8: Remilia Collective COL

Enforcement of Royalties Through Technological Innovations

In the midst of evolving marketplace dynamics, a segment of creators and industry proponents uphold the necessity of royalties for the sustainability and growth of the creative community. Innovations such as ERC721Cs and pNFTs are emerging as potential solutions to enforce royalties:

Figure 9: Enforcable Royalties- Implications for Pudgy Penguins

  • ERC721Cs Explained: ERC721Cs propose an evolution of the ERC721 standard, integrating transfer security policies that empower creators to enforce royalty payments, thus offering greater agency over their work's economic conditions.

  • Potential of Programmable NFTs (pNFTs): On the Solana blockchain, pNFTs represent a leap forward in royalty enforcement, embedding stringent controls within their architecture to prevent the bypassing of royalty obligations. The token standard was launched earlier this year and has seen an increase in creator royalties on Solana.

Concluding Reflections

The discourse surrounding NFT royalties is more than an economic debate, it's about the ethos of the NFT community and the foundational principles of web3 economics. As the industry approaches this controversial intersection, the collective decisions will sculpt not only the future of NFT marketplaces but also the infrastructure of creator and collector relationships.

Personally, I believe this conversation is a step backwards for the maturation of the NFT ecosystem. The lack of education around NFT Finance primitives that could aid in alternative revenue streams for NFT collections are not posed as a solution in mainstream NFTs, and therein lies the issue.

Royalties have always been an extremely easy way to collect money for NFT collections and there is a disconnect between the reward of early success and volume (therefore collecting millions in royalties) and the long-term incentive to deliver value for their holders and community.

At the end of the day, there are two sides of this coin:

  1. Creators can hope that someone figures out a royalty-blocking infrastructure that sets the NFT space backwards, but brings in easy money.

  2. Or lean into web3 mechanics and create alternative revenue streams.

    Figure 10

    Figure 11