The Death of Royalties Will Transform NFT Business Models
Author: Anthony Estebe
To date, the NFT market has largely been hype-driven. Attractive projects with cool art and significant marketing budgets have dominated the conversation, with little focus applied to long term sustainability. If we’re being honest, the primary incentive in the space has been secondary market royalties. While very lucrative, this model has not been healthy for the industry and has mostly inspired laziness and rug pulls. Now, these royalty mechanics are being phased out and NFT projects are forced to take control of their business model for a fighting chance to survive.
It might be news for some but enforcing creator royalties on the secondary market is currently impossible. All NFT creators must understand this shift in dynamic, as it is dangerous to enter the market with an expectation of never-ending passive income. This requires new creative approaches to monetization, something that I believe is very healthy for the NFT space overall.
Royalty standards have been a focus of mine for nearly a year, with recent trends making this topic quite timely. I’ve seen this as inevitable, with the enforcement of royalties being in the hands of the marketplace facilitating the transaction and not at the protocol level. To be honest, it happened quicker than I thought. The first red flag was when OpenSea migrated to Seaport, which does not support royalties. Instead, Seaport hosts transaction fees, which include royalties within them. This development is extremely logical because it is more cost effective.
While OpenSea changing its protocol was the warning shot, Sudoswap was the war call against royalties. This increasingly influential NFT marketplace eliminates creator royalties on the secondary market, allowing traders to transact without the 2.5-10% fee. It’s now officially a new time for NFTs, as the death of secondary market royalties is upon us.
The trajectory of the market is changing and all creators must be prepared to confront this. So what does this mean for NFT creators? How will this impact business models in the years to come?
A Focus on Long-term Projects
The royalty reliant model incentives projects to sit back, relax, and collect income. Sitting and doing nothing is never a sustainable business model, and by eliminating royalties we will likely inspire a shift away from quick cash grabs and rug pulls. This is a great thing for the space, as more focus will be applied to long-term projects with a strong business model.
While royalties incentivize little action, no royalties inspire creative thought. Every project is different on the primary market, from sales price to utility to minting access. The consistent value for all projects has been on the secondary market, where a majority of money has been made. It has been all hype and trips to the moon with little effort applied to sustainability. Now, every project needs to step back and focus on how to continue secondary market financial momentum without guaranteed royalties.
This is a natural progression. If a project wants to build trust, they must focus on the long-term strategy. Gone are the days that a project can mint out, set it and forget it. Strong NFT projects will be designing new business models around secondary market activity. Whether it be free mints, prioritized marketplaces or community rewards, now is the time to get creative with your long-term strategy.
Taking Control of Your Business Model
The business model around an NFT collection deserves attention. It is unhealthy for the space and your own business to expect to create an NFT collection and generate passive income for the rest of your life.
When creating an NFT collection you are building a business. Whether you are selling a product, access to a community, or simply art, strategy should always be applied to ensure your business will last 2, 5, 10 years down the road. If you simply rely on royalties from the current system, you’ll be dead in 6 months.
When you see industry leaders like Yuga Labs creating their own chain and marketplace, they are taking control of their business model. They recognize the importance of optimizing their technology around their products and community. Some bigger projects are exploring this direction because they also understand what is required to ensure control of their business model and avoid the pitfalls of a rapidly changing industry.
Tap into the Power of Marketplaces
As marketplaces wield the power over royalties, savvy creators can explore ways to take advantage of this shift in dynamic. Whether it be through strategic partnerships or custom marketplace development, there are several ways to get creative.
Creators fostering partnerships with existing marketplaces can see a lot of upside, but these are also dangerous waters to traverse. Agreeing to a percentage of platform transaction fees in exchange for promoting the platform and bringing your audience can be financially rewarding. A significant cut of all transactions is similar to a commission or royalty, however the power still belongs to the marketplace. This marketplace can always delist your collection, prioritize competitors, or simply block your actions at any point.
The development of a custom NFT marketplace is the best long term approach because it also enables control over a creator’s business model. Creators can incorporate whatever financial model best suits their project and community. Royalties can be enforced, and even redistributed to the community members as financial incentive. This serves as a great marketing tool, inviting new members to join, access royalties, and support the growth of the project.
Think of it as creating an open general economy inside of your product. Sure sales will always exist outside of your ecosystem, but you can control what happens within your ecosystem and inspire members to engage with you instead of elsewhere. Having your own platform means controlling the flow of buyers, redirecting them to the ideal virtual locations and positioning yourself for long-term success.
This topic might be sensitive for some projects, but consider it a wake up call. Secondary market royalties are no longer a sustainable business model and it is time to act accordingly. My work with Liteflow helps equip creators and businesses with the NFT marketplace infrastructure needed to future-proof business models and position projects for long-term success. We have been preparing for the end of secondary market royalties, and utilizing customized marketplaces as a tool to take control of business models.
We love being able to help any business grow using NFTs, and marketplaces represent one of the biggest opportunities for sustainable growth in Web3. If you’re interested in bringing your ideas to life, reach out to us at Liteflow