NFT market slump causes creators’ payouts to plummet 98% as royalties are slashed.

NFT market slump causes creators' payouts to plummet 98% as royalties are slashed.

The Rise and Fall of the NFT Market

Source: AdobeStock Image source: AdobeStock / denisismagilov

The NFT market, which once experienced tremendous growth, is now facing a downturn, causing tension between traders and creators of digital collectibles. The controversy revolves around the reduction of royalty rates by top NFT exchanges such as Blur and OpenSea. The decision to lower royalty rates was made to stimulate more buying and selling in a market that has seen a drastic decline in trading volumes. According to a recent report from Bloomberg, NFT trading volumes have plummeted by 95% from $17 billion in January 2022. As a result, royalties, which reached a peak of $269 million in January, have dwindled to just $4.3 million in July.

The significant drop in artist income resulting from reduced royalty rates could discourage new work and further stagnate a market that is already experiencing a downturn. To understand the challenges facing the NFT market, it is important to examine its journey from success to decline.

From August 2021 to May 2022, the NFT market enjoyed a prosperous period, with cumulative monthly royalties reaching $1.5 billion. This success was largely driven by popular collections like Yuga Labs Inc.’s Bored Ape Yacht Club. However, as the market began to decline due to the waning effects of pandemic-era stimulus, creator payouts suffered.

The introduction of Blur in October caused a significant disruption in the NFT market. The platform incentivized trading by lowering royalty rates, quickly capturing over 70% of daily volume on the Ethereum blockchain. This move put pressure on the previously dominant OpenSea platform to follow suit. “With the launch of Blur, NFTs became progressively more financialized,” noted Ally Zach, a research analyst at Messari.

The NFT royalties dilemma has sparked debates among experts. Some suggest embedding royalty rates directly into the software governing NFTs, rather than allowing exchanges to adjust them as variable variables. Marketplaces like SuperRare and Art Blocks have implemented mechanisms to enforce these payouts. Chris Akhavan, chief gaming officer at NFT marketplace Magic Eden, stressed the importance of governing rules through code, stating, “As with all things in web3, rules must ultimately always be governed through code, not through hoping social norms will be enough.”

Shiva Rajaraman, Chief Business Officer of OpenSea, acknowledged the need to find new opportunities for creators to engage with their communities and make a living beyond traditional creator fees. He proposed linking NFTs to merchandise sales as a potential source of income for artists.

However, artist Matt Kane, whose Right Place & Right Time NFT sold for over $100,000 in 2020, warned about the potential negative impact of reduced quality and diversity of NFTs resulting from lower transaction costs. Kane shared that many of his collectors are patrons of the arts who manually send him additional royalties after transacting on non-enforcing platforms.

The NFT market stands at a crossroads, with conflicting viewpoints on the best path forward. Kane emphasized the importance of moving towards a non-zero-sum economy, where one person’s win benefits the many, rather than regressing to a zero-sum economy where one person’s win comes at the expense of others.

In summary, the NFT market’s slump and the resulting tensions stem from changes in royalty rates implemented by key exchanges. The decline in trading volumes and artist income has prompted discussions on alternative ways to support creators and maintain the quality and diversity of NFTs. As the blockchain industry evolves, it is crucial to find innovative solutions that balance the interests of artists, collectors, and the broader ecosystem.