NFTs were hailed as a revolution for creators, promising lifetime earnings through resale royalties. The premise was simple: embed a percentage fee in a smart contract, ensuring creators earn with every secondary sale. By 2023, this vision is crumbling. Galaxy Digital’s 2023 report reveals a 60% drop in royalty payouts since 2022, driven by marketplace competition and legal gray areas. Platforms like Blur, which made royalties optional, forced creators into a lose-lose choice: waive fees or lose sales. This erosion isn’t just financial—it’s a breach of trust between creators and collectors.
How NFT Royalties Were Supposed to Work
Royalties are lines of code in NFT smart contracts dictating a percentage of secondary sales to be sent to a creator’s wallet. Ethereum’s ERC-721 standard allows for such logic, but compliance relies on marketplace cooperation. ERC-2981, introduced in 2022, standardized royalty communication, streamlining automatic payouts. However, platforms can still ignore these codes. The ethical and economic appeal was clear: sustained creator income fuels ongoing innovation, benefiting collectors through project growth and asset appreciation.
The Broken Promise: Why Royalties Are Failing
Marketplace Wars: Blur’s 2023 strategy of optional royalties pressured creators to disable fees to remain competitive, costing $1.1 billion in lost royalties in Q1 alone. OpenSea’s attempt to block royalty-avoiding platforms backfired, accelerating trader migration.
Legal Gaps: U.S. courts have dismissed royalty lawsuits, ruling smart contracts aren’t legally binding agreements. Jurisdictional ambiguity in decentralized ecosystems complicates enforcement.
Exploitative Tactics: Traders bypass fees via private sales, wrapped NFTs, or platforms that quietly disable royalties for high-volume traders.
Can Smart Contracts Fix This? Technical Solutions
ERC-2981: Standardizes royalty declarations but lacks enforcement; platforms like Blur bypass it.
ERC-721-C: Allows creators to blacklist non-compliant marketplaces. Adopted by projects like Manifold, adoption is slow due to platform resistance.
On-Chain Enforcement: Sound.xyz enforces royalties at the contract level, deducting fees even on decentralized exchanges. Interoperability across blockchains remains a hurdle.
Dynamic Royalties: Experiments with fee scaling (e.g., 10% below 1 ETH, 5% above) aim to balance creator and collector incentives.
Case Studies: Projects Getting It Right
Art Blocks: Paid 200 million to artists via hard 10690k in royalties from a $6.9 million resale, reinvested into new work.
Sound.xyz: Royalties are non-negotiable, enforced across all platforms. Artist Daniel Allan earned six figures, funding albums and tours.
Bored Ape Yacht Club: Yuga Labs’ 2.5% royalty funded metaverse development and legal battles, maintaining a 10x floor price premium over competitors.
Legal Battles & Regulatory Shifts
Yuga Labs vs. Ryder Ripps: A 2023 court ruling awarded Yuga $1.6 million in damages and lost royalties, treating royalties as enforceable contractual terms.
EU’s MiCA Regulation: Effective 2024, mandates fee transparency, pressuring platforms to disclose royalty policies.
SEC Scrutiny: Potential classification of NFTs as securities could impose mandatory royalties in the U.S., risking over-centralization.
A Buyer’s Guide: How to Ethically Invest in NFTs
- Audit Smart Contracts: Use Etherscan to check for ERC-2981 or ERC-721-C functions. Avoid mutable contracts.
- Choose Ethical Platforms: SuperRare, Foundation, and Zora enforce royalties; avoid Blur and Sudoswap.
- Track Transparency: Projects like Sound.xyz display real-time royalty dashboards.
- Avoid Wrapped NFTs: These often strip royalties.
- Join Advocacy: Support DAOs like SongCamp and boycott non-compliant platforms.
The Future of Royalties: Predictions & Tools
- Dynamic Royalties: Tiered fees and evasion penalties will gain traction.
- Cross-Chain Tracking: Tools like Royalty Registry expand to Polygon and Solana.
- Buyer-Led Accountability: Communities will blacklist royalty-evading traders using platforms like Nansen.
- Legal Precedents: Lawsuits against platforms enabling evasion will rise post-2025.
- Protocol-Level Solutions: EIP-7281 and Uniswap v4 Hooks aim to enforce royalties without marketplace compliance.
Your Role in Fixing the System
The royalty crisis stems from choices, not technology. Buyers hold power:
- Demand Transparency: Verify contracts and boycott opaque projects.
- Leverage Tools: Use OpenSea’s “Creator Earnings” filter and Royalty Registry.
- Advocate Collectively: Join campaigns like #StandWithCreators and govern platform policies via DAOs.
Ethical investing isn’t charity—it’s strategic. Projects enforcing royalties (Art Blocks, BAYC) thrive because creators innovate. The future of NFTs hinges on valuing fairness as much as profit. Your choices today will define whether Web3 becomes an equitable ecosystem or a speculative graveyard.
