On Marketplaces and Creator Royalties
Let’s start with a couple facts:
1) The NFT ecosystem would be a tiny fraction of what it is today if it weren't for creator royalties.
2) The leading marketplaces of the past couple years would be nowhere if they hadn’t supported them.
Bored Apes minted for what was a very low fee at the time–$220 a pop. Projects weren’t selling out, and we were highly incentivized to just get our project out into the world. And when it came time to figure out what our royalty percentage was, we also went lower than what was standard at the time. How did we determine it? The leading NFT marketplace, OpenSea, was (and is) taking 2.5% on all trades on its platform. Basically we said: If OpenSea was going to take that much off the top for other people wanting to join the club we created, why shouldn’t we?
The end result has been that OpenSea has made around $35 million dollars from Bored Ape sales on its platform, not including any of our other collections. We’ve never met the founders but perhaps they have a beach house somewhere with a plaque for us.
In recent months however, marketplaces across the ecosystem have gone from softening their commitments to enforcing creator royalties to outright ditching them in a race to the bottom in an attempt to gain market share. Just days ago, OpenSea made its position clear that they intend to move with the rest of the herd and remove creator royalties for legacy collections from their platform while keeping their trading fee the same across the board.
For a lot of artists and creators, the existence of creator royalties has been the single most important factor that brought them into the ecosystem. It’s a gift to be directly supported by the market’s continued demand for your work. Something that was previously reserved for record labels or brick and mortar auction houses. And to boot, it’s all transparent, on the blockchain–right there for anyone to see.
For as much as NFTs have been about users truly owning their digital assets, they’ve also been about empowering creators.
A PATH FORWARD FOR CREATOR ROYALTIES
The question of late has been, is there a way to continue the practice of creator royalties, while still preserving what’s core to NFTs–real digital asset ownership.
We’ve been talking about this a lot lately. Internally, with friends, and with other NFT founders. And after discussing with Melonpan over at 10KTF, we landed on a potential path forward together.
First, let’s make one thing clear – free wallet-to-wallet transfers are a must for whatever solution we come to. People need to be able to move assets from wallet to wallet. For privacy reasons, for security reasons and to respond to hacks, etc., or just because they fucking want to and because the whole point of this space is asset ownership.
So no, the solution is not to introduce smart contract code that requires people to pay a fee (flat or otherwise calculated from an oracle, or whatever) every time someone wants to move an NFT from one wallet to another.
Because of the nature of blockchain, if we aren’t taxing or blocking wallet-to-wallet trades this means that it will always be possible to do an over-the-counter (OTC) trade.
Meaning, you could tell your IRL friend hey, give me cash, or send some ETH to my Coinbase, and I’ll send you my Bored Ape. And we won’t pay fees to anyone for that.
And that’s totally cool.
That’s exactly how royalties have worked for the past couple of years.
…so is there a way to preserve creator royalties, but also make it so that wallet-to-wallet transfers function fine?
We think so, in the form of an allowlist that allows trading between normal wallets (also known as externally owned accounts or EOAs) and specifically allows marketplaces that respect royalties.
How do allowlists work?
Unlike deny lists, which enumerate wallets and smart contracts that are specifically banned from transferring an NFT, allow lists only allow good actors to participate, avoiding a number of problems. Prime among them is that using a deny list would inevitably result in a game of whack-a-mole, where new marketplaces would get deployed continuously to avoid paying creator fees.
So how would a version of this allow list work? A basic version:
When a transfer comes in, check if it’s a regular wallet (EOA) making the request, or a smart contract
If it’s an EOA (again, a normal wallet), then you let it go through. Marketplaces don’t use EOAs, so this is either someone making an over-the-counter trade, or moving their own NFTs around. You can’t tell the difference; let it through.
If it’s a smart contract that has initiated this transfer, check against an oracle of contracts that are known to respect royalties. If it matches, let it go through. If not, nope.
Coding something like this into your NFT smart contract will make it so that creators can make sure they collect their royalties.
There are some tradeoffs, of course. What are they?
New marketplaces will have a harder time starting up because they now need to get on the allowlist to be able to transact.
You’ll have to maintain the allowlist (or the oracle that contains the allowlist).
It’s here where some people will say that’s not decentralized!
But, that’s bullshit. It’s not impossible to create a healthy allowlist process, especially if all normal wallet-to-wallet transfers are enabled by default and can’t be prohibited.
What it is, is a governance problem. We just need to figure out what the right structure and process is for the governing body or DAO that controls the allowlist.
To start with, there are only a handful of known good actors today. Starting the allowlist is easy–just add those couple marketplaces that pay creator fees. Done.
But of course, the allowlist will need to be added to in the future. New marketplaces will spin up that want to pay creator fees but also bring new innovations to the space. There should be a process for them to be audited and added to the list. And we’ll want to whitelist things like Gnosis Safes, which some NFT holders already use for security, as well as future things we don’t know about yet.
So the real work is just in figuring out what this governing body looks like. But I think that’s a solvable problem for the NFT ecosystem to take on.
-Wylie Aronow (Gordon Goner), Greg Solano (Garga), Kerem Atalay (Tomato), and Randy Chung (Melonpan)
Note: I realize the solution presented above involves new NFT smart contracts, and so doesn’t directly address the matter of creators retaining royalties for existing collections. There are potential solutions for this (like wrapping). There’s also the simple fact that only marketplaces that respect creator fees will be able to list new collections from the top NFT creators, and so the top marketplaces with the most liquidity will be creator-friendly ones.
This system should allow transfers between smart contract wallets, like the Gnosis Safe, by including an allowlist of smart contract code hashes for implementations of trusted smart contract wallets.