This article is a guest post by the prolific artist Magusz – Twitter and Instagram: @magusz_art
Some time ago a buzz started on Twitter about creator royalties for NFTs. To give a bit of context, royalties are a percentage of profits that creators can get from secondary sales of their work. With blockchain and NFTs that become almost a standard, bringing a new potential revenue stream to artists that have been lacking fulfillment in the “usual” art world. Why? Well, in the art world collectors may sell on a piece of art that they have collected, but it’s difficult to have a clear paper trail of those sales. Also, artists may not have knowledge about the sale of one of their original pieces, and so would not be able to claim a percentage of those sales. Even if they had the knowledge it would still be a difficult, if not impossible, task to track the sellers and buyers and legally enforce the payment of royalties.
Thanks to the Phantasma blockchain and smart contracts, royalty percentages are automatically sent to the creator upon any secondary sale as this has always been a native feature of Phantasma’s Smart NFTs. Let’s look at how the discussion around royalties for digital art got started. This was a right that was fought for by the OG crypto artists, and it started with Dada.art and their Creeps & Weirdos collection in 2017. The concept was revolutionary, and could bring something new to artists – a way for them to achieve perpetual income if their art was to keep being purchased on the secondary sales market.
Collectibles moved the market
Now in 2022, the talk about royalties continues to exist and is even stronger. Why? Mainly because the NFT ecosystem has moved massively towards collectibles, and this has become the main factor for collectors to invest and take profits from flipping NFTs and selling them on for secondary income. Art continues to have a huge market, but indeed this movement towards trading collectibles has put collectors and investors in the center – and not artists.
So if profit is the main interest, the more the better right? Cutting back on royalties (and market fees) delivered a higher profit margin for all of those investing hard in NFTs. To put this into perspective, most artists (and collectibles projects) set between 5% to 10% royalties. When resale values reach numbers above $100.000, those 5% to 10% turn into a powerful incentive for collectors to ditch them completely and move towards markets and collections that do not have royalties set. With an increasing trading volume, the absence of royalties represents huge savings for traders.
2022 – Still a problem?
So why is this discussion trending again? What is happening that’s causing royalties not to be implemented? The recent buzz was triggered becausee one marketplace (Sudoswap) decided not to honor the royalties set by creators and used that as a marketing tool. But how can they do that? Aren’t royalties written into a smart contract? Yes and no.
To be clear, all this talk has so far been mainly about the Ethereum blockchain, and that is important to be able to understand why it is possible to bypass royalty settings. On Ethereum the royalties are not forced through the smart contracts – each platform or marketplace can decide to honor them or not. Yes, you read that right: it is not forced through the smart contract on the Ethereum blockchain. Opensea has been (in)famous for that for a long time. Even with new tools like Manifold (a tool to create smart contracts for artists) that sets the royalties from the start, you still needs to enable them manually if you wish to sell your NFT on Opensea.
Most of the marketplaces respect the royalties, but there are still a lot of flaws in this system. For example, if an artist sells a piece on SuperRare and the collector resells the same piece on another marketplace, the royalties are not forced and so the artist gets nothing. To be fair, many collectors know this and send manually and by their own initiative the respective percentage of the secondary sale to the artist. But not all of them do this, whether it is due to a lack of knowledge, to achieve higher profits or due to a lack of respect for the original artist.
More markets are following this model and completely ditching the royalties on Ethereum. The next move now is coming from X2Y2 which gives collectors the freedom to decide how to act through different options:
Being an artist, I am absolutely against this kind of attitude from marketplaces. I understand it for collectibles since most of them are backed up by VCs and have big funds to grow. In those cases the artist behind it was usually hired through Fiverr or a similar platform, and as such is not getting royalties anyway (there are a few exceptions with collectible projects launched entirely by artists). Artists and collectible projects that are run by teams and backed up by different investors are completely different things.
So how can artists fight this issue? Kaigani created a Proof-of-concept artwork where he coded into the smart contract which marketplaces can sell his work (the ones that respect the royalties). There are still some flaws with this, but that’s why it’s a proof-of-concept.
Besides these efforts to try to innovate and create some alternative solutions for the royalties not being respected on the Ethereum blockchain, there’s not much that an artist can do. They can always communicate with their collectors, have conversations with them about this issue and be clear about its importance and how it can affect artists’ lives.
It is possible to create our own white label marketplace (with Rarible Protocol for example) with 0 fees so that the collectors have a different benefit and do not need to run away from honoring the royalties. But this is still far from an ideal solution, and most artists do not have enough visibility and reputation to attract collectors to use their own marketplace.
But in the end, it’s still a choice for the collectors since they can buy in the white label marketplace and still resell in any other that does not honor the royalties.
Is it just an Ethereum problem?
Apparently, no. At the Solana chain for example, SolanaartNFT is following the same path, announcing 0 royalties (and 0 fees – these are different things). Since most chains follow the initial path of Ethereum (due to it still being the biggest market for NFTs), it’s clear that this problem can become even bigger than initially predicted. Researching a bit about Tezos chain it seems that this is not a problem so far, but some marketplaces have a standard royalty set so that the artists do not have any say in choosing the percentage charges as royalties.
But luckily not all chains follow the same path, nor the same way to create and use NFTs. That’s where the Phantasma blockchain comes into the picture.
Can Phantasma solve this?
According to the founder Sérgio Flores: “In Phantasma we took great care in the initial design of the system to include features in the core of the chain that were exposed to smart contract developers, unlike projects like Ethereum where features are created via ERC extensions and are usually optional. For now, in our system, if a marketplace wants to take advantage of compatibility with other markets, it has to accept the standard that includes royalty support.
It is possible for a market to decide to get around the royalties by doing everything from scratch, with the disadvantage that they lose compatibility with the NFTs released in other Phantasma markets. And since Ghostmarket was the original market for Phantasma and already has a massive amount of NFTs and users, a competitive market that decides not to use the royalty system will lose a lot in making that choice.”
Is it bulletproof? No. In theory it is still possible to go around the smart contracts, but as Sérgio explained that would be a lot of work, it would need to be created from scratch and would lose compatibility with the already existing NFTs. So indeed, Phantasma seems to be on something, a way to ensure royalties from scratch.
Yes, I am aware that at the moment Ghostmarket is the only marketplace on Phantasma, but there’s a big potential there as it keeps growing – not only for the Art market but also for the creator economy in general. Think about, for example, creators that make wearables for games. The gaming industry is huge and it’s coming strong to Phantasma chain thanks to Smart NFT tech.
Make no mistake, Phantasma was created from the start with a clear intention of taking advantage of all the possibilities and potential of NFTs. Ethereum was not created with that intention. NFTs appeared after and Ethereum is constantly adapting to it as the market grows, causing some limitations in how new features can be implemented.
Another thing I really like about the Phantasma system ,and which is reflected on Ghostmarket, is the opportunity that the creator has to set their own royalties from 0 to 50%. That gives the artist freedom to try different things. Most platforms have a standard 10% royalty setting which cannot be changed. I know that 50% may seem like a lot, but I used it once for some NFTs in a giveaway. Since it was offered, some people abused and collected several editions. But in this way, when they sell it, I collect 50% for something which was free initially.
As an artist, it is very important for me to be able to guarantee that my royalties are set and honored across marketplaces. Having started my NFT journey on Phantasma, I am glad to see why and how this chain was created, so this would not be a problem in the future. I can see a bright future, and know that when more marketplaces come to Phantasma I will (most probably) still have the royalties honored and as such guarantee a lifelong income. That frees my mind from worries and allows me to keep doing what I love, which is to create.
From my experience and by talking with several artists, the majority do not have the technological knowledge to find solutions for the royalties problem or are even aware of it. Artists are caught by surprise when they see that they don’t get the royalties (which is their right) because of failures on Ethereum contracts and how easy it is for marketplaces to go around it whenever they want.
I do hope that more solutions will appear, and that other chains will follow Phantasma’s example in caring about the artists and ensuring their rights are fulfilled. Freedom for the creator to set their own terms and conditions is really the key element that we need to focus on and develop further.
Thank you for reading. I hope this brings some clarity on the subject from an artist’s perspective.