Market royalties for NFT creators are on the way out

Just as Instagram, the biggest social network for looking at pictures, opens up to non-fungible token sales, it looks like the potential for NFT's to provide artists with recurring income is fading.

The big picture: Fewer and fewer marketplaces are honoring artist royalties — a payment that rewards creators during secondary sales — built into NFTs.

Why it matters: If the coolest creators stop making cool stuff, interest in the NFT scene could dry up. That extreme scenario is unlikely, but some creators — such as those for whom making digital collectibles had been just barely worth it — might stop.

Driving the news: If the old news adage that three makes a trend is right, then this is a trend.

• Sudoswap and X2Y2 are eschewing royalties, but those are still fairly minor players.
• Magic Eden is a marketplace that rivals the market leader, OpenSea, but it primarily focuses on NFTs running on the Solana blockchain. It made royalties optional in October.
• Then late last week, the decentralized autonomous organization (DAO) behind the LooksRare marketplace also moved away from royalties; however, LooksRare is redirecting a quarter of its platform fees to creators.

Of note: OpenSea declined to comment to Axios on this trend. Everyone is waiting to see when and if the dominant marketplace drops royalties.

What we're watching: The layer-2 scaling system for NFTs, ImmutableX, has a solution in its ecosystem to enforce royalties through whitelisted and blacklisted marketplaces. It announced today that it would deploy the solution to Ethereum.

• The question is whether or not it preserves user experience well enough for buyers.

Our thought bubble: It doesn't feel great, but the writing is on the wall. Royalties are going to go.

Zoom out: There's a parallel happening right now in the broader cryptocurrency market, as exchanges are in a race-to-the bottom in trading fees.

• All of which follows exchanges used for stocks eliminating fees in 2019.

Context: For collectors — the ones that buy an NFT every now and then, sit on them and hold a long time, and maybe use them as keys to get into some parties — paying a 3 to 8 percent royalty one day isn't that discouraging.

• But most of the volume in NFTs comes from people trading much more actively than that, and for them those fees really add up.

Be smart: A part of the popular narrative around NFTs was that royalties were built into the operation of the blockchain. This was never true.

• The documentation of each NFT simply requests a royalty and, until very recently, most marketplaces just honored that request.
• Anecdotally, NFT creators have also been asking for more and more lately, putting more and more pressure on marketplaces to drop all royalties.

The other side: There could be a bright side for everyone. Making fees optional could foster new ways for creators to get creative about how to foster stronger communities.

• For example, artists could offer special airdrops of NFTs or tokens to owners who pay the royalty (it's all viewable on the blockchain).
• Obviously that's more work, but some say NFTs are really more about community than the digital object.
• Magic Eden has put up a million dollars in prizes for a hackathon in which teams can come up with pro-royalty paying strategies.

Meanwhile, people voluntarily paying royalties now appear to be dropping fast.

The bottom line: $1.8 billion in royalties have been paid out to creators on the Ethereum blockchain alone, according to Galaxy Digital. That number is, undoubtedly, growing much more slowly now.