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https://content.fortune.com/wp-content/uploads/2023/04/IMG_3087.jpg?w=2048The minute you step into the Pace Gallery’s location on west 25th Street in New York City, its large glass doors and gleaming white walls immediately convey an aura of exclusivity.
Not long ago, the fine art world embodied by Pace didn’t include NFT artists or many of the up-and-comers who’ve since made a name for themselves with the blockchain-based tech. Yet, until April 22, as part of its Web3 hub Pace Verso, the gallery is hosting an exhibition by Tyler Hobbs, one of the top-selling NFT artists and the creator of Fidenza, a series of 999 flowing generative artworks composed of multi-colored blocks, which each go for a minimum of about $115,000 on OpenSea.
QQL: Analogs, Hobbs’ Pace Gallery exhibition of real-life paintings—each includes its own NFT—shows just how far non-fungible tokens have come since the first collections popped up in niche corners of the internet five years ago. It also exemplifies the artist-focused side of two increasingly competitive factions when it comes to creator royalties, something that the high-speed trading types who defined the market frenzy of 2021 care little about.
NFT artists who program royalties into the smart contract, or underlying technology behind the work, get paid a percentage—usually 5% to 10%—every time an NFT is sold. On a $10,000 sale, an artist may get $1,000, but if it’s later sold for $100,000, the cut increases tenfold, and from just two sales that artist has been paid $11,000 total.
Yet, for those NFTs that haven’t hardcoded royalties into their tech (which could include older collections or collections from smaller artists) the two leading marketplaces Blur and OpenSea have dropped the minimum royalty to 0.5%, with the option to pay up to 10% on OpenSea and an unlimited percentage on Blur. At 0.5%, a $10,000 secondary sale of an artists’ work would net them just $50.
Lower creator fees change the calculus for NFT artists—while a new profile picture NFT collection may launch every day, artists like Hobbs are more deliberate. Benjamin Tritt, founder of robotic painting company Artmatr, which collaborated with Hobbs for the exhibition at Pace, said it was the result of a nine-month-long effort. The mission: getting people interested in art and “pushing painting forward,” Hobbs told Fortune at the exhibition in late March.
“I’m mostly just really excited that other people are really resonating with that, and that other people are seeing interest for the same reasons that I see interest,” he said.
While many lesser-known artists in the NFT space undoubtedly have similar motivations to Hobbs, the looming threat of diminishing creator royalties across marketplaces has them reconsidering how they practice their craft—and earn a living.
For Art Blocks creator and generative artist Melissa Wiederrecht, fewer royalties means diverting attention from cultivating her fanbase, she said, which prevents her from taking the time to make her projects better. Roughly 15% to 25% of her income comes from royalties, and she’s already seen a monthly decrease, although she admitted it could be due to declining interest.
For new collections, Wiederrecht is in part adapting to the inconsistency of creator fees by holding back more works in a given collection. For a recent collection on NFT marketplace Verse, Wiederrecht said she kept 106 of the 916 pieces, more than she usually would’ve held back.
“If my work took off to be as valuable as a Fidenza, but then there were no royalties and people are trading my work for $1 million apiece, then I would have some, and I could at some point potentially sell one and also have some share in that upside,” she explained.
Fewer people buying her current or older collections could cost her economically, but so, too, could producing too many pieces too quickly.
“I don’t mind putting out new work all the time,” Wiederrecht told Fortune. “But I fear that it would flood my market, and with that, possibly devalue my older work.”
This all comes in addition to warding off scammers who offer fake artwork. She said she spots counterfeits every few weeks, especially fraudulent pieces from her Art Blocks collection Sudfah—Arabic for “happy accident.” On one occasion, a hacker put together a collection using unfinished pieces she had tweeted, which bothered her because she hadn’t yet released them. (As part of an effort to thwart the proliferation of fakes, Art Blocks recently launched its own secondary marketplace.)
Courtesy of Melissa Wiederrecht
Jake Rockland, Art Blocks’ chief technology officer, told Fortune that the creator royalties each artist chooses are baked into the platform for every collection, even those that have not hardcoded the royalty percentage into their smart contracts. Enforcing royalties, he said, helps artists and discourages those who merely want to flip the NFTs for profit.
“Art Blocks is not a good place for them to shop,” he said.
If an artist wants a 10% royalty for an NFT, they can get that percentage of a sale through the Art Blocks marketplace.
On the largest marketplace, OpenSea, royalties are still enforced, with some caveats. Artists can use OpenSea’s on-chain enforcement “operator filter” to ensure new collections receive the desired royalty amount—the tool lets them hard code that figure into the smart contracts. The catch is that this will block the NFTs from being listed on marketplaces that don’t enforce royalties, meaning the pieces won’t reach as many potential buyers.
Older collections will need their smart contracts updated. If an older collection doesn’t—or can’t—have its code updated, it will default to the 0.5% minimum royalty. There’s an option to pay more (up to 10%) but only if the seller generously sets the percentage higher—and there’s little incentive to do so since that fee is deducted from what the seller is paid.
Some NFT marketplaces are happy to welcome traders who are looking to make a quick buck and have little, if any, interest in making sure artists get paid.
Blur, a newcomer that launched in October, was one of the first to target “pro NFT traders” with its promise of 0% trading fees and optional royalties. Later, it began enforcing a minimum royalty of 0.5%, and once it overtook royalty stalwart and market leader OpenSea in trading volume, the company jumped to remove its 2.5% trading fee temporarily and lower its minimum royalty to match Blur’s 0.5% for certain collections.
OpenSea last week reinstated the 2.5% trading fee on its platform following the launch of a new OpenSea Pro product, but kept the lower 0.5% creator fee in place on the new professional trader-focused platform for older collections and those that aren’t using the operator filter tool, according to an OpenSea spokesperson.
“While creator earnings will remain a crucial part of broader NFT earnings, we believe creators and developers will introduce new and complementary business models surrounding the technology,” OpenSea’s chief business officer, Shiva Rajaraman, said in a statement.
While secondary marketplaces get pulled in either direction by those on each side of the royalties debate, the NFT market just had its best quarter since mid-2022. NFT trading volume spiked to $4.7 billion in the first quarter, up 137% from the last measuring period, according to a report by DappRadar.
Still, some turbulence potentially looms as OpenSea needs to remain competitive and market leader Blur needs to be sustainable, according to Sara Gherghelas, a blockchain analyst from DappRadar. Gherghelas said Blur’s approach of giving away rewards in its native cryptocurrency while taking no cut of its massive trading volume could leave it dead in the water, unless they have something in the works.
“I think they just want their name to be out there,” she said. “Then they will produce something, they will launch a new tool.”
In a plus for those on the side of creator royalties, Gherghelas said that Art Blocks, which launched its royalty-enforcing marketplace about two weeks ago, sports a high level of users interested in art for the art’s sake.
In the last six months, Art Blocks outdid two popular Yuga Labs collections, Bored Ape Yacht Club and Crypto Punks, in the number of sales and number of unique traders, Gherghelas said. While BAYC and CryptoPunks had 4,922 and 2,409 sales, respectively, during that period, Art blocks had 39,363, albeit at a lower average prices. With 15,345 unique traders, Art Blocks dwarfed the number of traders interacting with the two Yuga collections combined by more than 11,000 people.
As for the eventual winner of the royalties argument, nobody quite knows the answer. Although, among those assembling in New York City this week for the NFT.NYC conference, the pro-royalty voices could grow even louder, which would be just fine with Wiederrecht.
“If there are royalties, it gives me a chance to sit back, be more intentional about my work, be more careful about it, and think about it before releasing something,” she said. “It also gives me more time to make those projects better.”
