OpenSea joins the optional royalty camp, ending the era of mandatory royalties on mainstream platforms.

OpenSea ends mandatory royalties on mainstream platforms by joining the optional royalty camp.

Author: Nancy, LianGuaiNews

Recently, OpenSea announced that it will shut down the royalty enforcement tool “Operator Filter” on August 31st and switch to implementing an optional creator fee model. This news immediately sparked protests from multiple parties, with BAYC’s parent company, Yuga Labs, leading the resistance, stating their commitment to protecting creators’ royalties and gradually ceasing support for all upgradable contracts and any new series on OpenSea SeaPort. So why is OpenSea stopping the mandatory collection of creator royalties? And what projects will be significantly affected?

OpenSea Controversially Transitions Royalties from Mandatory to Optional

A few days ago, OpenSea officially announced that starting from August 31st, it will no longer enforce creator royalties but instead introduce an optional creator royalty mechanism to better reflect the choices and principles of ownership that drive this decentralized ecosystem.

In simple terms, starting from March 2024, sellers can decide the split of secondary sales, and if they set the split to 0, creators will not receive any revenue.

Specifically, the disabling of the royalty enforcement tool includes four main aspects: (1) discontinuing the OpenSea Operator Filter from August 31st, 2023; (2) for collections that had the OpenSea Operator Filter enabled before August 31st, 2023, as well as collections that exist on non-Ethereum blockchains, OpenSea will enforce the creator’s preferred fee in all secondary sales from August 31st, 2023, to February 29th, 2024; (3) starting from August 31st, 2023, it will make it easier for buyers to identify secondary sale listings that include the creator’s preferred fee; (4) starting from August 31st, 2023, it will make it easier for sellers to choose the creator’s preferred fee or customize their creator royalties payment method.

Although the Operator Filter introduced by OpenSea in November 2022 was intended to restrict creators’ NFT secondary sales to NFT markets with mandatory royalty enforcement mechanisms, filtering out platforms like Blur that offer optional royalties or zero royalties, as mentioned in the tweet, the success of the Operator Filter relies on the participation of everyone in the ecosystem, but unfortunately, this has not happened. In fact, although the Operator Filter allows creators to blacklist NFT markets without mandatory royalties, NFT markets such as Blur and LooksRare have bypassed the operator filter by integrating OpenSea’s NFT aggregator Seaport protocol, bypassing the blacklist and avoiding creator fees. In addition, in February of this year, OpenSea had already hinted at adjustments including a limited-time zero fee, revised optional royalties (minimum 0.5%), and updated blacklists.

Meanwhile, OpenSea Pro (formerly NFT aggregator Gem) announced that with the adjustment of creator fees, it will charge a 0.5% platform fee on all OpenSea listings and sales created on OpenSea Pro starting from August 31st. The platform also stated that this adjustment is necessary to prevent market manipulation and maintain transaction data as accurate as possible.

In fact, the recent adjustment of OpenSea’s royalty structure is not unrelated to the market difficulties it faces. On the one hand, as the market turns bearish, NFT prices and trading volumes continue to decline, indicating a decline in trading interest from NFT traders and affecting platform revenue. According to Dune data, as of August 22nd, the weekly trading volume of NFTs has dropped by over 96.9% from its peak of nearly $330 million in January 2021.

On the other hand, OpenSea’s market share is being increasingly taken away. According to Dune data, as of August 22nd, OpenSea’s market share of weekly trading volume was only 22.8%, only one-third of Blur’s, and it was as high as 95.6% in January 2022. At the same time, in terms of weekly trading volume, OpenSea’s market share is 57.6%, down more than 63.6% from January 2022.

The optional copyright mechanism implemented by OpenSea has also sparked numerous criticisms. For example, Mark Cuban, the owner of the NBA’s Dallas Mavericks, expressed on social media that as an investor in OpenSea, it is a huge mistake for OpenSea not to charge and pay royalties for NFT sales, which undermines people’s trust in the platform and damages the entire industry. Phillip Kassab, the head of NFT and gaming growth at Sei Labs, also stated that reducing royalties on platforms like Blur and OpenSea is a short-sighted strategy that ignores the delicate balance of empowering traders and creators, upon which the sustainable success of this field is built.

Head projects are the first to bear the brunt of the royalty system reform

Yuga Labs was the first to protest against OpenSea’s adjustment of the creator royalty mechanism. On August 19th, Yuga Labs officially announced that it would gradually stop supporting OpenSea SeaPort’s upgradeable contracts and any new series.

In fact, royalties are a very important source of income for project parties, so NFT trading platforms usually focus on royalties. However, with the market downturn, creators’ earnings are facing a significant decrease. According to Nansen data, royalties for NFT market licenses have dropped to $4.3 million in July this year, a 98% decrease from the peak of $269 million in January 2022, as transaction fees have decreased from 5% per transaction to 0.6%.

What is more deadly for creators is that as OpenSea also shifts to an optional creator royalty model, it means that the NFT market no longer has top trading platforms supporting mandatory royalties. For example, Blur, LooksRare, and others use the optional royalty model, while SudoSwap adopts a zero royalty strategy, and so on.

According to data analyst @LianGuainda Jackson’s previous statistics, during the trial period of Operator Filter (November 8th to December 12th, 2022), 31.6% of the 2,215 new collections used mandatory licensing fees, and the adoption rate increased from 14% to 40% within four weeks. Almost 80% of the total trading volume of new collections was contributed by mandatory royalty collections. Moreover, the data also shows that in transactions where licensing fees are not mandatory, only 0.8% of transactions comply with the licensing fees, while in transactions where licensing fees are mandatory, this proportion is 86.6%. This data indicates that if royalties are not enforced, creators can hardly receive royalties, as royalties increase the cost for buyers. Although this data is not the latest, it does to some extent confirm the importance of mandatory royalties for creators.

In the face of the situation where creators are unable to sustain royalty income, which NFT projects may be more affected? According to Definitive data, as of August 22nd, the top 10 NFTs in terms of royalty income are BAYC, Otherdeeds, Azuki, CLONE X, Moonbirds, Doodles, LianGuairallel, RTFKT-MNLTH, and VeeFriends. Among them, BAYC has a royalty income of $58.8 million, ranking first; Otherdeeds ranks second with an income of $52.7 million; Azuki ranks third with an income of $44.1 million; CLONE X and Moonbirds follow closely with $37.7 million and $28.1 million respectively.

In summary, regarding this royalty revolution on OpenSea, some people believe that the optional royalty or zero royalty strategy may attract NFT traders in the short term, but in the long run, it will lead to a lack of creative motivation for creators, which is not conducive to the continued innovation and development of NFTs. However, some people also believe that the existence of royalties is detrimental to NFT liquidity and will further expose investors who are already facing losses to additional losses.