OpenSea joins the optional royalty faction, ending the era of mandatory royalties on mainstream platforms, and NFT project revenue will be affected.

OpenSea joins optional royalty faction, affecting NFT project revenue and ending mandatory royalties on mainstream platforms.

Author: Nancy, LianGuaiNews

Recently, OpenSea announced that it will shut down the royalty enforcement tool “Operator Filter” on August 31 and shift towards 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 that they will continue to protect creator royalties and gradually stop supporting all upgradable contracts and any new series on OpenSea SeaPort. So why is OpenSea stopping the mandatory collection of creator royalties? And which projects will be most affected?

OpenSea Controversially Transforms Royalties from Mandatory to Optional

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

In simple terms, starting from March 2024, sellers can decide the percentage split for 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 31, 2023; (2) enforcing the creator’s preferred fee for all secondary sales of collectibles that were enabled with the OpenSea Operator Filter before August 31, 2023, as well as collectibles that exist on all non-Ethereum blockchains from August 31, 2023 to February 29, 2024; (3) starting from August 31, 2023, making it easier for buyers to identify secondary sales listings that include the creator’s preferred fee; (4) starting from August 31, 2023, making it easier for sellers to choose the creator’s preferred fee or customize their payment method for creator royalties.

Although the initial intention of Operator Filter, launched by OpenSea in November 2022, was to limit creators’ NFT secondary sales to NFT markets with mandatory royalty mechanisms, thus filtering out platforms like Blur that offer optional or zero royalties, as mentioned in the tweet, the success of Operator Filter relies on the participation of everyone in the ecosystem, which unfortunately did not happen. In fact, despite allowing creators to blacklist NFT markets without mandatory royalties, platforms like Blur and LooksRare bypassed the operator filter by integrating OpenSea’s NFT aggregator Seaport protocol, thereby 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, a 0.5% platform fee will be charged for all OpenSea listings and sales orders created on OpenSea Pro starting from August 31. The platform also stated that this adjustment is necessary to prevent market manipulation and maintain transaction data as accurate as possible.

In reality, the recent adjustment of OpenSea’s royalty structure is not unrelated to the market difficulties it is facing. On 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. Dune data shows that as of August 22, the weekly trading volume of NFTs has decreased by over 96.9% compared to the peak of nearly $330 million in January 2021.

On the other hand, OpenSea’s market share is being continuously taken away. According to Dune data, as of August 22, OpenSea’s market share of weekly transaction volume is only 22.8%, which is only one-third of Blur’s, and it was as high as 95.6% in January 2022. At the same time, in terms of the number of weekly transactions, OpenSea’s share is 57.6%, a decrease of more than 63.6% compared to January 2022.

OpenSea’s implementation of optional copyright mechanism has also sparked many 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 collect and pay royalties for NFT sales, which weakens people’s trust in the platform and damages the entire industry; Phillip Kassab, NFT and gaming growth director at Sei Labs, also stated that (the reduction of royalties by platforms like Blur and OpenSea) is a short-sighted strategy that ignores the delicate balance of empowering traders and creators, on which the sustainable success of this field is built.

Under the reform of the royalty system, leading projects are the first to bear the brunt

In response to OpenSea’s adjustment of the creator royalty mechanism, Yuga Labs took the lead in protesting. On August 19, Yuga Labs officially announced that it will gradually stop supporting OpenSea SeaPort’s upgradeable contracts and any new series.

In fact, royalties are an important source of income for project parties, so NFT trading platforms usually focus on royalties. But with the market downturn, creators’ income is facing a significant reduction. According to Nansen data, the licensing fee for NFTs has dropped to $4.3 million in July this year, a decrease of 98% from the peak of $269 million in January 2022, as the transaction fee rate has decreased from 5% per transaction to 0.6%.

What is more fatal to creators is that with OpenSea also shifting to an optional creator royalty model, it means that the NFT market no longer has leading trading platforms supporting mandatory royalties. For example, Blur, LooksRare, and other platforms 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 the Operator Filter (November 8 to December 12, 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, with nearly 80% of the total transaction volume of new collections contributed by mandatory royalty collections. Moreover, the data also shows that in transactions that do not charge mandatory licensing fees, only 0.8% of transactions comply with the licensing fees, while in transactions that charge mandatory licensing fees, this ratio is 86.6%. This data indicates that if royalties are not enforced, creators can hardly receive royalties, after all, 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.

What NFT projects may be more affected by the situation where creators cannot sustainably receive royalty income? 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 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 incomes of $37.7 million and $28.1 million, respectively.

In summary, regarding this royalty reform by OpenSea, some people believe that the optional or zero royalty strategy may attract NFT traders in the short term, but in the long run, it will make creators lack the motivation to create, thus hindering the continued innovation and development of NFTs. However, some people also believe that the existence of royalties is detrimental to NFT liquidity and may further harm investors who are already facing losses.

Related reading: What incentive models are more suitable for creators in the face of unsustainable royalties?