Author: Deepanshu Tripathi, Co-Founder of Asset Mantle

Sparking a heated debate on social media, NFT royalties have largely dominated the November crypto news cycle. While NFT dealers and collectors clamor for and against the merits and rights of web3 artists, many have forgotten the fundamental principles of the web3 paradigm that empower its users in the first place.

Critical parameters that govern platforms, such as whether artists receive royalties for secondary sales of their NFT artwork, are of lesser importance than the methods and mechanisms by which those parameters are determined and how they are applied.

To affirm their commitment to decentralization, i.e., on-chain transactions and on-chain governance, web3 NFT marketplaces must ensure that DAOs determine the parameters that govern NFT royalties. Furthermore, they need to ensure that all relevant parameters are hardcoded into their protocols via smart contract modules. Otherwise, community governance and trustless architecture are hot labels at best and a complete hoax at worst.

Even in the 2022 bear market, well-established digital artists can make a living selling their NFT collections on various web3 marketplaces. In addition to earning revenue from selling artwork up front in what are known as “primary sales,” artists also receive a smaller cut of all future trades on secondary markets, typically around 5 percent. Called royalties, these fees help stabilize artists’ income streams by providing ongoing income to supplement their otherwise infrequent primary sales from collection drops.

However, in recent months all that has changed. In August, the NFT market X2Y2 began allowing buyers to determine one’s own royalty contributions, essentially reducing what was once mandatory creator compensation to an optional gratuity.

On October 14, the Solana NFT market Magic Eden followed suit.replacing the mandatory royalties with a similar model of tipping if you wish.

In response, content creators across the web3 space took to Twitter to express their disapproval and general discontent, and with good reason. Having had the proverbial rug pulled out from under their feet, artists are right to feel marginalized and exploited.

But here’s the thing: blaming the NFT markets, as satisfying as it is, doesn’t do justice to the larger issue at hand. Like all organizations in the web3 landscape, NFT marketplaces compete fiercely with each other to boost their platforms and attract new users. In this prerogative, reducing fees for second-hand sellers from 5 percent to zero is simply a no-brainer; it puts money back into users’ pockets and costs the platform nothing. After all, it is in the very nature of free markets to lower costs to consumers through competition.

The issue at hand is not whether the platforms choose to disapprove of artist royalties, but whether they have any power to make that choice in the first place. The most fundamental value proposition of web3 ecosystems is that their protocols are owned, operated and governed by their users. For this principle to hold true in practice, web3 applications must operate completely on-chain.

Therefore, the issue at hand is that ERC721 and other popular NFT token standards do not support royalties directly through smart contracts. Instead, they rely on centralized marketplaces to meet and enforce royalty policies, all while competing with one another for cost-conscious users.

On November 5, the Ethereum NFT OpenSea marketplace published a Twitter thread describing his plan to develop “chain application tools” that supposedly allow NFT artists to release new collections with mandatory creation fees. Looking deeper, OpenSea’s enforcement tools function as a sort of blacklisting mechanism, allowing artists to block users from trading their NFT collections on marketplaces that don’t honor their creators’ fees. Merely a band-aid solution, OpenSea’s application tools fragment the NFT space and detract from the inclusiveness and interoperability that are integral to the web3 paradigm.

In the meantime, for the landscape of existing NFT collections, NFT marketplaces, and NFT traders, and really, the NFT space in general, there is high demand for a blockchain ecosystem where DAOS can determine on-chain royalties and other critical parameters governing NFTs. and encoded directly at the protocol level. Unfortunately, such features are not technically feasible on Ethereum or Solana, where most NFTs are currently located.

The clock is ticking. This time, the web3 community is no longer alone.

While web3 NFT communities wrangle and debate the nuances of artist royalties, web2 holders are quickly coming up with their own centralized alternatives. Tech giant Apple recently announced that it will now allow NFT marketplace apps on its App Store, despite collecting a 30% tax on all transactions. One would hope that despite their differences and disagreements, the early adopters that make up today’s web3 community can unite against the next iteration of web2 tyranny.

Ultimately, community governance should play a big role in shaping the values ​​of the NFT scene. Soon, they will not only be artists, but also musicians, gamers, writers, vloggers, and other live streamers looking to share and monetize their content in the web3 space.

The diversity of voices in the NFT community is set to grow exponentially. To support their values, communities, and content verticals in addition to those that already exist, DAOs play an indispensable role as on-chain mechanisms for organizing diverse community perspectives and fairly curating on-chain parameters.

To support DAOs, smart contracts serve as the only on-chain tools that can fairly and consistently enforce community-determined parameters so that content creators, consumers, and collectors can enjoy a free and open marketplace for content. digital content.

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