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NFT Royalty Payments: Potentially Game-Changing, Easily Bypassed

·4 min read
NFT
NFT

One of the biggest changes that non-fungible tokens (NFTs) can bring to the arts and music industry is the ability to add royalty payments on each resale. If they can make it work.

The music industry has gravitated toward the idea as the royalties musicians currently receive from streaming services are so small that only the top artists make real money. Sell an NFT loaded with a song, and every time it’s resold you get a set fee.

This works in two basic ways: using NFTs to fractionalize and sell royalty rights to a song and actually inserting a smart contract that collects a cut and send it to the artist who recording the music and minted it onto an NFT. Both sound great for creating a musical middle class that has in some ways been wiped out by miniscule streaming royalties.

See also: NFT Series: NFTs Used by Artists to Create Musical ‘Middle Class’

Visual artists have done much the same thing. Beeple, the digital artists famous for selling a $69 million NFT collage at Christie’s, has used them, including a 10% royalty built into one piece, CROSSROADS, that resold for $6.6 million — then the most expensive digital artwork auctioned, according to ArtNews.

The idea is that not only does the artist get an ongoing revenue stream, but pirating that particular copy of that song is made more difficult in the process. Those royalties can be legally required on the legal terms that can be written onto an NFT.

Still, royalties remain a work in progress.

Goodwill Required

The problem is that the collection and remittance of the royalty isn’t automatic. It’s impossible to build that into the smart contract due to the simple fact that the NFT itself cannot determine how much it has been sold for.

Setting royalties on an NFT really amounts to turning on a setting that asks the exchange an NFT is being sold on to collect a certain percent of the sale price and send it to the minter. Which most of the top marketplaces do.

However, that relies on the marketplaces’ — and sellers’ — goodwill, and recently, a couple such markets have sprung up in decentralized finance (DeFi) catering specifically to sellers who don’t want to pay the royalties.

One, sudoAMM, made a Twitter splash recently when the decentralized marketplace reached $10 million in sales on Aug. 11. That took it just 35 days.

Another, Solanart, took advantage of the Twitterstorm that followed by “re-introducing” itself as “the first zero fee marketplace” on the Solana blockchain — an Ethereum competitor picking up steam in the NFT project market. It advertised: “0% marketplace fee & 0% creator fee. This time YOU choose what’s fair.”

See: NFT Series: From Famous Artists to Forgers, the Art World Embraces NFTs

Which led former Spin magazine editor in chief and current co-founder and CEO of NFT news site nft now to tweet, “0% royalties are a non-starter. We’re not going back to web2 [nonsense]. Artists deserve to be paid in perpetuity.”

Which is an argument made when Napster started destroying the recording industry a couple of decades ago.

Build a Community

Mike “Beeple” Winkelmann’s addition to the discussion was to point out “to be clear we can’t ‘smart contract’ our way around this. If I have a NFT and I decide to ‘gift’ it to someone, and then they ‘gift’ me 10ETH afterwards, we have gotten around royalties. If someone can explain to me how any smart contract will EVER stop that I’m all ears …”

The solution, he suggested, is that “creators will have to build a collector base that WANT to honor these royalties …. It’s really that simple.”

That did not work well for Napster. On the other hand, most people felt they were sticking it to the labels, not the artist.

On the other hand, NFT creators have a tool that the record labels did not. While they could, and did, sue some casual downloaders pirates into bankruptcy as a warning, they couldn’t stop the music.

It’s been noted by NFT doubters that one problem is that even art files are generally too big to be economically loaded onto a blockchain, to say nothing of audio or video files.

What happens is the NFT points to a file saved somewhere on a cloud or server. Delete that file, and the NFT is useless and worthless.

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