How NFT royalties work and how creators can earn more

Transcript

gm gm welcome back to another episode on the web3 academy podcast which aims to guide entrepreneurs businesses and creators into the world of web 3. we're teaching you how to actually use this stuff rather than how to speculate on this stuff and today we have a great episode called the truth about nft royalties and how creators can maximize nft revenue i'm kyle read head i'm super excited to have you listening to this episode this is an article that i wrote on this topic nft royalties have become a very popular conversation at the moment and a lot of people aren't sure what's going on here so this is going to break it all down for you and then give you some tips to ensure that you're still earning revenue royalties or otherwise

before i get into the episode though i need a favor if you're listening on spotify apple podcast youtube wherever it is please follow us or subscribe to our spotify apple podcast in youtube these follows these subscriptions this is what allows us to rank higher in the podcast world in the youtube world and get us up higher on the rankings for this category we want to make sure this podcast gets in front of as many people as possible it's a small step for you all you got to do is just stop what you're doing open up your phone your desktop whatever just go to spotify apple podcast click follow and that's it it's a small step for you it's a big thing for us super grateful for you thank you so much for doing that right now and now since you've done that let's

get into the episode and teach you about nft royalties so royalties on nfts one of the great unlocks of web 3 right and not so fast turns out web doesn't really have a solution for royalties after all i mean royalties are definitely possible in nfts don't get me wrong it just might not be what many of us thought so by the way in case you're unaware nft royalties are a means by which a percent of the value of an nft transaction is given back to the original creator of the nft typically this is in the range of 2.5 to something like 10 of a transaction just depending on what the creator sets

now what's been gaining a lot of attention lately and why this has become such a hot topic is thanks to the new nft marketplace pseudo swap okay and it's that the royalties on nfts can be circumvented in fact pseudoswap has decided to do to do just that for all nfts sold on their platform but how is this possible you might be asking isn't it written in the code isn't web3 all about immutability and permissionless exchanges shouldn't this just work well yes web3 is all about those things however there are limitations to what it can and cannot enable it turns out that royalties and nfts might be one of those things now don't worry my fellow listeners it's not all

bad news in this podcast i'm going to explain why receiving nft royalties is not a guarantee it's still possible and what you can do to ensure that you make the most from your nfts so let's just answer the question are royalties on nft is enforceable at the smart contract level the simple answer here is no they are not enforceable i actually asked this question on twitter to find out why and actually received some great responses from some of the big brains in this space if you're not following me on twitter it's kyle read head just go to k-y-l-e r-e-i-d-h-e-a-d it's also in the show notes and give me a follow but julian genestow who's the founder of unlock protocol he answered my question on twitter and he says that um

you can't do this you can't enforce royalties and fts even with contracts because the transfer function which is used to transfer the ownership of the nft has zero knowledge of the payment or the currency or anything else okay so it actually can't control that now you could do it in sort of a um you'd have to basically break it or disable the the contract in order to do it but it would make it much harder to actually use the nft so it wouldn't really work across most nft marketplaces and things like that so it's not an ideal situation david mihal also responded he's the founder of crypto fees uh done info on crypto stats well he also chimed in and he explained

that the smart contract of an nft can't enforce conditions against third parties such as marketplaces all it can do is provide some extra metadata to suggest conditions such as royalties but ultimately the marketplace has to implement them so just like you can have metadata of like your descriptions of what the nft are what the details are the rarities the traits all those things those are just pieces of data that the marketplace itself can decide to show or implement but it doesn't have to well the same is true with nft royalties okay so the tl dr is this it's not possible to hard code royalties into an nft which must be implemented by everyone who interacts with it that's marketplaces or

user wallets so what's possible today is that you can code in some data and should the marketplace decide to implement that data then it works without any problems however the problem is we have to trust that they will right and we don't want to trust marketplaces okay these are centralized in most cases centralized companies right and so we don't want to have to trust them to honor the royalties of creators trusting third parties is one of the main reasons we are rebuilding the internet in the first place so unfortunately we know where this ends up now thankfully this far into web 3's sort of early life the large nfc marketplaces have decided to honor and pass along the royalties to creators however a new marketplace in town called

pseudoswap has decided to exclude them completely and in an industry which is full of speculators and traders the extra profit earned by saving on royalties has attracted many to move from marketplaces like openc over to the low fee and royalty-free marketplace pseudoswap so sudaswap doesn't just circumvent nft royalties it's also very very low fees i think it's 0.5 percent for a transaction whereas on something like open c and the others it's around like 2.5 so for those who just want to make a buck i mean why wouldn't they go over there right competition like this is almost always results in a race to the bottom what i mean by that is fees go to zero um xenica who we actually had on the podcast um i think last week uh from

when you're listening to this amazing podcast by the way on nfts we do touch on this a little bit we go into a bunch of other conversations around nfts and business models but zenica said growing increasingly more convinced zero creator royalties is inevitable sadly projects and creators should be proactively thinking about alternative revenue models we certainly are at zen academy culturally we must fight for artists royalties at least in my opinion 10k projects are different i will get into some of these other alternatives in just a second but let's look at potential options for the future of nft royalties it's not all bad news we might be able to find a way to make this work so there are a few options out there number one devs can do something right build an

on-chain royalty standard so as i mentioned above the ability to implement entity royalties on chain does not currently exist but that doesn't mean it can never exist to be clear most developers in the space are saying it's simply not possible so maybe i'm being you know overly optimistic here but there is one industry that is known for solving massive problems and innovating quickly it's web3 right so there have been a few proposals in the ethereum community to start working on creating an on-chain standard for nmt royalties already including eip 4910 and eip2891 but 2d to be determined on how this will play out the second thing we can do is create an nft royalty standard in the community or

at the cultural layer okay so never underestimate the power of community especially in web3 sometimes we need to rely on the social layer to set standards and incentives there is a possibility that if we can't figure out how to build this on chain the community itself can enforce these standards across the industry nft marketplaces are an open and free market and can choose to change or do whatever they want however let's remember they are a business and in an industry built on top of interoperable technology so unlike users on facebook where we essentially are stuck with our profiles followers and content on that platform users on nft marketplaces can simply move to any marketplace seamlessly with a quick click of a button our assets our entities everything goes with us

so should the community decide nft royalties are important we can simply vote and enforce rules by choosing where we buy and sell our nfts so jeff kaufman founder of jump went as far as to say that honoring nmt royalties would be a form of marketing for the nft marketplaces so jeff says front of two royalties don't underestimate that when marketplaces honor royalties they're unlocking free marketing the creator or brand wants to drive traffic to the marketplace the marketplace doesn't pay the creator for this marketing the seller does well i tend to agree with the statement in the short term i believe as the industry grows it becomes more mainstream these web 3 ethos won't hold up as strong in my opinion these ethos need to be written in code and become trustless for

them to continue over time humans and especially businesses tend to trend along the lines of being greedy and looking for the most profitable way of doing things a final interesting thought that i came across on this is the idea of tipping in countries like the us so tipping is not law there however has become a cultural norm in a few countries around the world maybe we can accomplish something similar here um not sure that i believe that that's the way it's going to go but it's an interesting thought the final point is to build a collective base that wants to pay royalties or create additional revenue streams people put a tweet out on this and people summed it up nicely here he just said i think the creator royalty argument is

actually a lot simpler than people make it out to be there is zero way to force royalties technologically so creators will have to build a collector base that wants to honor these royalties it's really that simple so build a strong community and fan base like the best artists in the world have always done and people will be built willing to pay whatever you want for your art look the big takeaway here is that entities are simply a tool for your business it doesn't matter if that business is an exclusive community art a membership access or something else if you want to get paid for your work you need to create great work which provides real value to collectors or customers okay in 2021 people simply thought that if they created an nft they

would just make money right and to be honest the market was so immature and euphoric that this was actually kind of true the market is now maturing and people are realizing that an nft is not a magic way to make money it's simply a tool to enable digital ownership permissionless commerce and programmability to a pro product or service so let's talk about what creators can do to maximize their revenue when using nfts so how can we as nfc creators maximize revenue well my recommendation recommendation is to not rely on royalties for your business like any business it's important to to diversify your revenue streams think about other business models or avenues to generate revenue via these nfts

royalties can be one revenue stream for nft and if paying royalties works out then perfect that's all gravy for you but in case they don't there are many other options for you here are a few examples we've seen so far in this industry so one withhold a percent of your of your collection supply for future profits taking a piece out of the playbook from nft og larva labs creators of you know crypto punks me bits autoglyphs etc larval labs withheld ten percent of the supply of crypto punks so about a thousand nfts because they made ten thousand and they launched their collection with zero royalties as sort of a feature for the collection over time as crypto punks gained adoption and value they sold off some of that supply and then finally sold all of

it when the yugo labs acquired the ip writes to crypto punks you can think of this similar to holding onto equity or shares in a company right as it grows in value that the founders tend to take profit in the form of selling equity in their company so you can do kind of the same idea with nfts which to me is a great play makes complete sense it's you get rewarded if it works out and that's how this should be anyway the other way is intellectual property so there's a lot of experimenting going on with ip front of tees so i'm not going to give an exact model of what you can use here but instead i'll just show you some things to think about so i just mentioned how larva labs sold the rights of crypto punks uh to hugo labs so i mean there's a revenue stream in itself

they made a quite a a buttload of money from that sale but also if you created the typical 10k character or avatar or pfp or whatever to represent let's say a community you could then build additional businesses or products around those nfts whether that be some merch digital content like a show or a movie or even a video game this is what you're seeing with things like moon birds where they're building a metaverse uh board yacht club is doing this as well so there are many ways that you can monetize the brand or the ip of whatever it is you create there's even potential that your nft holders will do it for you it just depends how you decide to incentivize the community so basically what i'm saying is the nft itself doesn't need to always be the means of

ongoing revenue obviously when someone buys the nft off of you when you first mint you make some money but you don't need reoccurring money from those nfts you can build other things around those nfts around that ip and that's how you can generate revenue or the next thing up is subscription-based nfts so this likely doesn't work well for let's say art nfts although maybe but definitely community-based nfts you know sas products and so on you can create nfts which expire at a certain time whether it's one month one year et cetera and they're burned unless the subscription payment is made or you can take it one step further whereby only people who pay and hold your subscription nft are able to buy

and mint your other nfts it's almost like an exclusive access membership for your top fans this will give you an ongoing revenue stream and likely ensure that those buying your art will honor the royalties as well so there's a lot of potential here for many products using subscription-based nfts now look if you want to get someone to you know subscribe to you in order to mint your stuff you're going to need to create good content so if you want to be an artist or a creator you've got to create good art right if you want to create a cool product and use an nft to sell it you've got to create a really good product so this just doesn't come easy but there are plenty of opportunities to generate revenue so long as you're creating good things there's also something called a harburger tax

these are similar to property tax you pay a monthly or a yearly sort of fee to keep your token you don't pay it you lose it this type of payment can actually be programmed on chain into the contract unlike royalties as herberger taxes are not related to peer-to-peer or marketplace transactions so this is a different concept than most people are used to so it's hard to say how well this would go over but another option nonetheless so basically they're they're sort of paying a subscription fee in order to have access to this token this is kind of what this is you can think of it more as a tax though these are just a few ways you can create additional revenue streams from the nfts that you create so in conclusion i fully support

creators receiving royalties on their nfts and feel optimistic that web3 will find a solution to this problem my hope however is that we can find a way to solve this problem on chain rather than relying on trust as history shows that trust rarely works out in the long run that said it's important to understand that royalties may never be enforced at the smart contract level which means there's always a risk that creators won't be paid the royalties that you deserve this is why it's so important to never rely on nft royalties as the only revenue stream for your business instead you should look to diversify and find additional means to generate revenue from your nf team nfts the other important factor to recognize here is that

if you can just build a strong community or collector base you can always find a way to win one way or another like everything in web3 community is the foundation upon which success is built so my recommendation to all creators out there is to start by building a community around your mission or your vision or whatever it is that you're doing then you can be open and transparent with that community and use them to experiment with different forms of nfts and payment options until you find something that works for you and works for your community the nft space is so early we're still in the learning phases so there's there's no perfect model yet in the meantime it definitely doesn't hurt to start creating building and experimenting on your own who knows maybe it'll be the

next larva labs paving the way for millions of nft creators coming after you thank you so much for listening this podcast nft creators keep creating keep building keep doing really cool things and keep experimenting like i said this is all still new we're still trying to figure out what is the best way to do things um so innovate right innovate and iterate and just keep trying and see what works i gave you a list of opportunities and options above um but uh maybe there's new things that you can try and if you have those feel free to tweet out at me or tweet out at academy let me know what you're thinking of how we can continue to drive revenue um with our nfts but otherwise if you like this episode don't forget to follow

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disclaimer nothing in this podcast was financial advice crypto and web3 can be risky you can literally lose it all in fact if you invest on account of what we say you probably will lose it all so don't do that in all honesty the point of this podcast is to remove the noise of markets and price and focus on utility implementation anyway so you should not take any of this as financial advice thank you friends and see in the next one