Royalties and NFTs — The goalposts have been moved
In the frantic fury of the 2020–2021 NFT mania, there were many attracted to the proclaimed promise of “LIFETIME ROYALTIES” bro it’s on the BLOCKCHAIN! The promise is simply to make an NFT and collect royalties for your entire life on every sale, this is the breakthrough of this technology they said. Not only can you stick it to the evil Vilian speculators that are stingy and don’t really understand art, but you you get a passive income source for your entire life! This sounds great!
Artists and creatives are in general underpaid and underappreciated in the days of Fiverr and AI mass-produced consumable non threatening design art things. There is no question that artists and creatives need a way to monetize their work outside of the legacy models. Without question, the existing royalties systems do not serve these ends. However, the very nature of blockchain technology and bearer assets is at odds with royalties systems in general.
In this writing, I will explain how ERC721C and the current royalties discussion around Opensea, Magic Eden, and Yuga Labs are simply moving the goalposts of trust and I will touch on why BLOCKCHAINNNNN and royalties do not work but I would encourage you to read my past writings Using blockchain tokens for royalty payments | 2018 and NFT Royalties — Villan-Speculators or Villan-Marketers? Efficient Marketing Hypothesis (EMH) | 2021 where I go in to detail on this topic. With that being said iiiiiiiiiiiiiittTTTTTTTTTSSSSSSSS TIME!
Royalties MUST be enforced by a third party
The problem that people perceive with royalties is that they are not hard coded into smart contracts. Each marketplace, such as Open Sea, is simply a smart contract or a series of smart contracts. These smart contracts are mutable, meaning that they can be updated. One day the marketplace could operate like a zoo and the next day like a garbage disposal, this is the freedom granted to the contract owner.
Why does this matter? If Open Sea were to say today creator royalties are 5% but in a week they are 10% they could do so. They could of course say, fuck royalties and that heap of hot shit, which is what it looks like is happening now. In this model you are always depending on a third party, in this case, the marketplace, to enforce royalties. The point of failure to collect royalties is at the marketplace/smart contract level. Proposed solution, simply hard code the royalties in the smart contract! Sounds simple but it has -massive- implications on how we use this technology.
The goalposts have been moved
The solution? ERC721C which allows royalties to be hardcoded into the smart contract itself. While this sounds good it requires the creation of a “Walled Garden” which is a series of whitelists of contracts that can be interacted with and permissions that are granted to a sender and/or receiver. While this does grant a lot more power to the creator it also grants them a lot more -work- and in the end this work will be outsourced to, drumroll………. a third party. Let us have a look at why this is the case.
When in a dark room one does not see the Pandora box that one has opened
As you can see already at level 1 there is a whitelist. How do you create these whitelists? How do you decide which smart contract to allow and not allow? Since marketplaces are fluid, mutable smart contracts you might need to update your whitelists. You might realize already by reading this far that as an artist this is not something that you really want to deal with, you just want your royalties, just give me my royalties whatever the fuck I need to do can I press a button? Sure! I will provide you with a list of “good behavior” smart contracts and “behaved evil speculator villain colleecctooorrrsssss” and you can just press a button. BOOM we just trusted a third party to enforce the royalties! The goalposts have simply moved from the contract enforcing the royalties to who controls the whitelist, allowlist, blacklist, guestlist, and viplist all the lists.
What sounds like doomsday is our reality
The fact of the matter is that marketplaces come and go. Marketplace policies change. Collectors come and go, as do their policies and habits. The only solution is a dynamic allowlist which always needs to be up to date. This is the never-ending cat-and-mouse game of the walled garden that is built with ERC721C. It gets worse! What if the maintainer of the allowlist, the creator, or a third party is simply not around, not to be found, dead, or in prison and it is set to let’s say level 6. Then you are fucked, maybe for life. You own this cool NFT but you can’t send it anywhere, sell it on a marketplace, or do much of anything because you can’t add the receiver to an allowlist and none of the current marketplaces are on the allowlist either. This is WORSE than what we have now.
Let´s go through a few more examples to illustrate what could happen.
Self-inflected REKT
Janice mints an ERC721C with level 2 and sells some of the NFTs on a marketplace. She even collects some royalties from secondary market sales, however, she still has 5 NFTs left in her wallet from this edition. She gets a message from someone who wants one but does not understand how the marketplace works. They are an art collector but new to NFTs and do most of their business OTC. Whoops, level 2 does not allow -the artist- to send directly to this interested party, it is not -allowed-.
We all get Lambos
Mathew mints an ERC721C level 6 and sells out! He rakes in significant numbers in royalties. Congrats! Two years later while in his lambo he is wondering how he is going to make the monthly payment on his car. The royalty payments have stopped. The main marketplace where the secondary sales were happening has relaunched and thus has a new smart contract. The allowlist needs to be updated but he can not get in touch with the third party that he used to mint the NFT and provide the on-click allowlists. His lambo gets repoed and he rage quits NFTs on twitter. “I WAS TOLD ROYALTIES ARE FOREVER!”
Freedom of Transaction
Mae mints an ERC721C level 5. It does well and sells out. She has a significant income from royalties and is quite happy. One high-profile collector of her works often goes on political rants on social media. After one particular rant, he tries to move one of his NFTs from his hot wallet to his cold wallet. Both should be whitelisted, but it is not working today. His cold storage address has been removed from the allowlist. The owner of the contract did not agree strongly with his last rant and decided he should get rekt.
All markets are efficient, even the NFT market
As soon as the market understands how the tech actually works the hockey stick of exipendal liquidity will exit said assets. What does this mean? This means the market will go along with ERC721C at first, as they have no time to really understand if they bought an NFT with ERC721C level 0,1,2,3,4,5, or 6. They will learn through pain, after the fact, as most humans do. In the same way, many artists will not even know if they set the ERC721C level to 0,1,2,3,4,5 or 6 either. Whatever minting service has a default will be the norm, and this is yet another example of how a third party will decide and be trusted as to how best to enforce royalties.
What is the question?
The question is not if artists should find a way to profit from the secondary market. The question is -how-. I do not think a royalties system is the way to do this as it is at odds with how blockchains and bearer assets function. When I buy an ERC721C I am buying an NFT*. The * are whitelists and permissions that can be updated by whoever controls the smart contract. If our goal is for artists and creators to profit from the secondary market in the long term we need another solution beyond royalties.
What is the solution?
There is no solution we are all REKT.
I digress, we should look beyond royalties. I proposed a time lock vault much like a vesting contract where artists lock up a % of their edtions for X amount of time. This pleases the market and the artist can profit from secondary market speculation when the lock up time has expired, if they wish. This also does not require allowlists, blacklists, or dependence on marketplaces to enforce x,y or z. I go into some more detail at the bottom of this writing NFT Royalties — Villan-Speculators or Villan-Marketers? Efficient Marketing Hypothesis (EMH).
Maybe level 6 ERC721C is great for some 1 of 1 NFTs. However it still introduces some issues that I have described and we should all think about before pressing buttons and expecting lambos.
Post Scriptum
I am more than willing to discuss any and everything on a voice or video livestream with neutral third party host, I have taken part in hundreds of youtube panels, countless real-life panels and informal discussion, ask around. If one would like to see the references of said panels I am more than willing to reference them as to provide evidence to be reassuring to anyone potentially involved that I do indeed debate in good faith.
Best,
Theo Goodman
