Using blockchain tokens for royalty payments
A royalty is not a king, queen, duke or duchess but something else compleatly: “ A royalty is a payment made by one party, the licensee or franchisee to another that owns a particular asset”
A simple example is when a song is played on the radio. The radio station often has to pay an amount of money to play the song. This money eventually reaches the artist or owner of the song. Before we make this more complex than it needs to be we are going to use an example of a painting.
Sometimes art is bought by someone and then resold for 2x 5x or even 100x of what they bought it from the artist for. Just like in any market the artwork is worth whatever someone is willing to pay for it. In a market where the assets are for the most part one of a kind and value is highly subjective it is not easy to evaluate what a “fair” price for the art is. Some artists that are good at making art but not great at trading, marketing, pricing or understanding how markets work want to find a way how they can get a cut of the sale each time the artwork is sold. Instead of just a one time sale, this would mean each time the artwork changes hands the artist would get a % of the sale. That sounds great on the surface! The artists can do what they do good, make stuff, and the art investors, trader and speculator types can do what they do best while both sides make money!
Just like a lot of costs that are attached to the sale of anything from a gallon to milk to a garbage pail sticker, the costs are priced in. In simple terms that means that the cost of the royalty will make the artwork more expensive. Will this cause the artwork to be sold less often? It is hard to say if that would happen and would depend on the % royalty that the artist gets.
If I have to pay 5% on 1000$ that is only 50$ but I might just add that on top to make it 1050$ or 1100$. If I want to get 1000$ then the 50$ has to come from somewhere and that somewhere would be the buyer. Fiddy dollars does not sound like a lot, but let´s say the painting costs 100000$. Then the seller will just pay 5000$ out of their our good heart to the artist? No way, the 5000$ will be priced in.
How to get around paying the royalty
The theory is that if you use a blockchain token to solve this issue then the payment of the royalty is automatic, transparent and you are not able to get around paying the royalty since it is locked into a “smart” contract. If we are talking about high value one of a kind pieces of digital or physical art then it is feasible to want to get around paying a royalty. Of course, the artist did the work, but from a trader´s point of view they didn’t put capital at risk and thus should not be rewarded for doing nothing. The artist has already sold the work once and a never-ending “tax” on the artwork is “unfair” from this perspective. To get around the royalty simply hand over the private keys to the address that holds the token, and BAMM — No royalty payment.
Sam: I am selling this painting for 100k USD
Tim: Yea but if I buy it I have to pay 5% royalty if I resell it, I don´t want that kind of baggage.
Sam: No problem, if you will pay 101k USD which is less than the 5k that I would add on to the price for the royalty I will show you how to get around that.
Tim: Humm, ok explain to me how you want to get around a blockchained artwork not automaticly getting a royalty payment via irreversable smart contract deployed on the ETH network and audited by the best blockchain auditing company. The smart contract was written by a start up that raised 35 Million USD in their ICO, I highly doubt you can outsmart this smart contract.
Sam: Let´s see if the 35 Million USD ICO thought about this work around. Do you see this usb stick? This has the token on it. It has the private keys with it. I will just give it to you in your hand and you are then the owner.
Tim: Nice try, but I am sure you have a copy of the private key somewhere.
Sam: Of course you have to trust that I have not copied the private key and have it stored somewhere else. I want to keep doing business with you though. We have done business in the past and I am risking my repuation here. This is the risk that we are taking by getting around that stupid 5% tax on our hard work.
Tim: Yea I see what you mean. Ok Ill bite, Ill put the cash on the table and you put the usb on the table, then I will inspect usb contents. If everything is cool you can have the cash.
Tim & Sam: DEAL
That is a lot of trouble to get around paying a tiny royalty!
No it is not. If these are one of a kind physical or digital works then it really is not a lot of trouble to just give someone the private key. When there is too much friction due to price or technical know how then this would be the easiest way to change ownership. The more the artwork is worth, the more feasible it becomes to want to get around paying the royalty.
What do I own?
I am not a lawyer but this is an important question to ask. If I buy artwork with this royalty baked in, do I own the art?
“ A royalty is a payment made by one party, the licensee or franchisee to another that owns a particular asset”
Here we see the issue. Typically it is not the artist but the owner of the artwork that gets the royalty payment. So does the artist still own it or does the buyer own it? Do what you want but be sure as hell that if people are going to throw down real money they are going to want to own what they buy, IMHO.
But but but people will want to support the artists!
Yes, that is correct. People already want to support artists and might not know how. But wanting to pay royalties out of the goodness of your heart is not enough to warrant using a system that can be gone around while calling it the most secure thing ever made and impossible to cheat. It is possible to cheat as per above example. We need a system in which players can´t do bad, not a system in which people won´t do bad. At least one in which the incentives are aligned enough so that is not feasible for someone to be a bad actor.
Just let a platform, curator, gallery or community manage the private keys to the artwork!
Great, so if I buy the artwork do I own it? If the platform controls the private keys, they have custody. If you buy something then you should be able to have custody of it. What is the point otherwise? Can I hold the private keys to my tokens? If the answer is no then I do not own the artwork, at least there is no reason to use a blockchain for this and I can just use some other kind of centralized database.
Maybe I am wrong
If you have a way to prevent people from just exchanging the private keys of an address that holds the blockchain token then please post it or any other comments below.