Author: Nancy, PANews

Recently, OpenSea announced that it will shut down the royalty enforcement tool "Operator Filter" on August 31 and will shift to implementing an optional creator fee model. This news was immediately met with protests from many parties. Among them, BAYC parent company Yuga Labs took the lead in resisting, stating that it insisted on protecting creators' royalties and would gradually stop supporting all upgradeable contracts and any new series of OpenSea SeaPort. So why did OpenSea stop enforcing creator royalties? Which projects will it have a greater impact on?

OpenSea converts royalties from mandatory to optional, sparking controversy

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

Simply put, starting in March 2024, sellers can decide the share ratio of secondary sales. If they set the share ratio to 0, then creators will not receive any benefits.

Specifically, the disabling of royalty enforcement tools includes four main aspects: (1) deactivating the OpenSea Operator Filter starting on August 31, 2023; (2) for collectibles that enabled the OpenSea Operator Filter before August 31, 2023, and collectibles that exist on all non-Ethereum blockchains, OpenSea will enforce the Creator Preferred Fee on all secondary sales from August 31, 2023 to February 29, 2024; (3) starting on August 31, 2023, it will be easier for buyers to identify secondary sale listings that include the Creator Preferred Fee; and (4) starting on August 31, 2023, it will be easier for sellers to choose the Creator Preferred Fee or customize the payment method for their Creator Royalties.

Although the original intention of the Operator Filter launched by OpenSea in November 2022 is to limit creators' NFT secondary sales to NFT markets with enforced royalty mechanisms, thereby filtering out optional royalty and zero-royalty platforms such as Blur, But as the tweet mentioned, the success of Operator Filter relies on the participation of everyone in the ecosystem, but unfortunately this did not happen. In fact, while the Operator Filter allows creators to blacklist NFT markets that do not enforce royalties, NFT marketplaces such as Blur and LooksRare bypass the operator filter by integrating with OpenSea’s NFT aggregator Seaport protocol, thereby bypassing the operator filter. Blacklist and avoid creator fees. In addition, in February this year, OpenSea announced three major functional adjustments: 0 handling fees for a limited time, revised optional royalties (minimum 0.5%), and updated blacklists.

At the same time, 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 orders and sell orders created on OpenSea Pro starting from August 31. The platform also stated that this adjustment is necessary to prevent market manipulation and keep trading data as accurate as possible.

In fact, the recent adjustment of OpenSea's royalty structure is closely related to the market dilemma it faces. On the one hand, NFT prices and trading volumes continue to decline in the bear market, which means that NFT Trader's trading interest is declining and the platform's revenue has been affected. Dune data shows that as of August 22, NFT's weekly trading volume has dropped by more than 96.9% from the peak of nearly US$330 million in January 2021.

On the other hand, OpenSea's market share is constantly being seized. Dune data shows that as of August 22, OpenSea's weekly transaction volume accounted for only 22.8% of the market, only one-third of Blur, while in January 2022 it was as high as 95.6%. At the same time, in terms of weekly transaction volume, OpenSea's share was 57.6%, a drop of more than 63.6% from January 2022.

OpenSea's implementation of the optional copyright mechanism has also triggered a lot of criticism. For example, NBA Dallas Mavericks owner Mark Cuban said on social media that as an OpenSea investor, it was a huge mistake for OpenSea not to collect and pay royalties for NFT sales, which undermined people's trust in the platform and damaged the entire industry; Phillip Kassab, head of NFT and game growth at Sei Labs, said that (platforms such as Blur and OpenSea cut royalties) is a short-sighted strategy that ignores the fact that sustainable success in this field is built on a delicate balance of empowering traders and creators.

Under the reform of the royalty system, top projects are the first to be affected

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

In fact, royalties are an important source of income for project parties, so various NFT trading markets usually make a fuss about royalties. But with the market downturn, creators' income is facing a significant reduction. According to Nansen data, NFT market royalties fell to US$4.3 million in July this year, a 98% drop from the peak of US$269 million in January 2022, as the transaction fee rate dropped from 5% to 0.6% per transaction.

What is even more fatal to creators is that as OpenSea also turns to an optional creator royalty model, it means that no leading trading platform in the NFT market supports mandatory royalties. For example, Blur, LooksRare, etc. use an optional royalty model, SudoSwap adopts a zero royalty strategy, and so on.

According to data previously collected by data analyst @Panda Jackson, during the Operator Filter trial period (November 8 to December 12, 2022), 31.6% of the 2,215 new collections used mandatory royalties, and the adoption rate rose from 14% to 40% in 4 weeks, and nearly 80% of the total transaction volume of new collections was contributed by royalty-enforced collections. Not only that. The data also shows that only 0.8% of transactions where royalties are not mandatory comply with royalties, while this proportion is 86.6% of transactions where royalties are mandatory. This data shows that if royalties are not enforced, creators will hardly be able to obtain royalties, after all, royalties increase the cost of buyers. Although the data is not the latest, it also confirms the importance of mandatory royalties to creators to a certain extent.

Faced with the situation where creators cannot continue to receive royalty income, which NFT projects may be more affected? According to Definitive data, as of August 22, the top 10 NFTs in terms of royalty income were BAYC, Otherdeeds, Azuki, CLONE X, Moonbirds, Doodles, Parallel, RTFKT-MNLTH and VeeFriends. Among them, BAYC's royalty income was US$58.8 million, ranking first; Otherdeeds ranked second with US$52.7 million; Azuki ranked third with US$44.1 million; CLONE X and Moonbirds followed closely with US$37.7 million and US$28.1 million respectively.

In short, regarding OpenSea's royalty reform, some people believe that optional royalties or zero royalty strategies may attract NFT traders in the short term, but in the long run it will make creators lack the motivation to create, which is not conducive to the continued innovation and development of NFTs; however, some people believe that the existence of royalties is not conducive to NFT liquidity and will cause investors who have suffered losses to face further losses.

Related reading: Royalties are unsustainable, what incentive model is more suitable for creators?