Author: Beichen

Sudoswap started a royalty war, and it’s not over yet.

The reason is very simple. In the bull market, everyone is striving to multiply the price due to FOMO. No one cares about the small royalties. In fact, royalties are the advantages that NFT collectibles have always been promoting. However, in the bear market, in order to compete for the market where activity has become very low, trading platforms have started to consider royalties, and it has indeed worked.

The opponents not only won on the economic level, but also pulled the war of words onto the moral high ground, thus gaining an absolute upper hand.

Of course, I am not a fanatical supporter of royalties. In fact, I think that more than 99.99% of NFT collectibles currently circulating in the market should not be subject to royalties, because these NFT collectibles have no value in the first place. I just think that it is meaningless for a group of people who neither understand NFT collectibles nor the market to discuss the NFT collectible market, just like a war on the horns of a snail. There is such a small fable recorded in "Zhuangzi". There is a country on the left tentacle of the snail, called Chushi, and there is a country on the right tentacle of the snail, called Manshi. The two countries of Chushi and Manshi often started wars for land disputes, with tens of thousands of corpses, and it took fifteen days to chase the defeated soldiers back. This war is undoubtedly grand and cruel, but it happened on the horns of a snail, which means nothing to us.

This article is not to evaluate the value of NFT collectibles, but to explain the impact of NFT royalties on the market from the perspective of economic principles. Therefore, this is a popular science article about the market itself, hoping to dilute those debates that exude the prejudice of small peasant consciousness and planned economy (this kind of prejudice is very common in life, but it is still unexpected in the field of NFT).

The basic operating principles of the NFT collectibles market are the same as those of all markets. The most basic is supply and demand. Many consumers and producers gather together at a specific time to form a market. The NFT collectibles market will at least follow the following principles:

1. In a perfectly competitive market, no buyer or seller can determine the price, and the market price is entirely the result of game theory.

Leeks will naturally stand on the buyer's side and imagine that all sellers in the market form an unbreakable alliance of interests. They control the supply, so they control the price.

But the market is not just a game between a buyer and a coalition of sellers. In fact, there is also competition between buyers (bidding), and there is even more intense competition between sellers (such as between OpenSea and X2Y2). The final market price is determined by the supply and demand of everyone in the market through countless transactions.

In other words, there is no trading platform (or trading platform alliance) in the NFT collectibles market that is determined to snatch money from buyers. If the price of this trading platform is unreasonable, buyers will naturally flow to the trading platform with reasonable pricing. We should give power to the market to decide, rather than simply thinking it is reasonable or unreasonable.

2. The difference between a monopoly market and a perfectly competitive market lies in the entry mechanism.

Leeks have no concept of a "perfectly competitive market". They will equate the market with a monopoly market and launch moral criticism based on this. Therefore, they will definitely cite many examples of monopoly markets to refute the above principle.

On the surface, in a monopoly market, only one or a few institutions determine the market supply and have market control. In this way, the NFT collectibles market fully meets the definition of a monopoly market.

But whether it is a monopoly market depends on its access mechanism. For example, if there is only one small shop in a village, you cannot conclude that this small shop has monopolized the retail market of the entire village. You still have to analyze it in detail. Is it that the village is too small to support two small shops, or is it that the small shop is opened by a village tyrant who does not allow others to open small shops to steal the business?

Similarly, we cannot conclude that the NFT collectibles market is a monopoly market based on today’s market structure. At least now the market is open to competition, but the result is that OpenSea is the only dominant player.

3. There is no difference in effect between taxing buyers and taxing sellers.

Royalties are embedded in the actual price paid. Whether they are collected from buyers or sellers, they are a portion of the final transaction price. What really affects the transaction is the actual amount paid by the buyer and the actual amount received by the seller.

It is like the intermediary fee when buying a house. It makes no difference whether it is charged to the buyer, the seller, or both. The buyer will consider his total expenditure, and the seller will consider the total income he actually receives, and finally form a relatively balanced price. To give another example, in fact, whether there is a common area or not, the actual price paid by the buyer is the same. The only difference is that eliminating the common area will reduce the confusion.

So X2Y2 provides buyers with a zero royalty option, but in fact, whether the buyer or seller is exempted from royalties, there is no difference in effect. Both allow buyers to pay less and sellers to get more money.

4. Whether the tax burden is borne by the buyer or the seller depends on who is more price sensitive.

The previous item explains that royalties are borne jointly by buyers and sellers, but the specific proportion depends on the elasticity of the supply and demand market. In other words, the buyer or seller who is more sensitive to prices will actually bear less royalties.

For example, in the manufacturing industry of socks, which has very low profit margins, manufacturers' profits are just a few cents, so they are more sensitive to price changes. They have to ensure that the actual money they receive is above a certain red line, but consumers don't really care about an increase of a few cents or a dime. Therefore, if an additional tax is levied on socks, most of this tax is actually borne by consumers.

But it is different for luxury goods. For example, the market supply of yacht companies is relatively stable, but the consumers who buy yachts are flexible (they have many alternative products, such as luxury cars, villas, airplanes, etc.). Therefore, if there are additional taxes, the price of yachts will not rise sharply, but the tax burden will be borne by the yacht companies.

In the NFT collectibles market, because the gap between collections is too large, it needs to be analyzed in detail. But in the end, if the collection is valuable, consumers are willing to bear more royalties to obtain the collection. If the value is relatively low, the royalties will quickly discourage them.

5. Wherever there are taxes, there will be unnecessary losses.

The existence of taxes makes buyers pay more, and buyers in the market will buy less, while sellers get less, and sellers in the market will sell less. Therefore, no matter what, taxes will suppress trading behavior, and reduced transactions are unnecessary losses.

The size of the deadweight loss is determined by market elasticity. The greater the elasticity of supply and demand, the greater the deadweight loss. The NFT collectibles market is a typical example of a market where both buyers and sellers have very high elasticity, so the existence of royalties suppresses a large amount of trading volume.

Summarize

1. The existence of royalties in the NFT collectibles market inhibits transactions, and the abolition of royalties can stimulate transactions.

2. Royalties from NFT collectibles should not be directly subject to taxation, because royalties are given directly to the creators, and collecting is a form of cultural consumption. Those who criticize royalties completely equate collectibles with financial products or consumer goods, thereby obliterating the legitimacy of the existence of royalties.

3. The difference between NFT collectibles is greater than the difference between species, so "whether royalties are suitable for NFT collectibles" is a false proposition. Only a certain series of NFT collectibles is suitable for royalties.

4. As for whether to cancel royalties, it should be left to the market to judge, not morality (this applies not only to ordinary collectors, but also to creators). Since we have come to the crypto industry, we should respect market laws and value creation.