On November 6, 2022, Opensea announced that it would launch an on-chain tool for enforcing royalties. Because it was only proposed at the time, there was no response from the market. However, as some project parties have recently begun to use the tool for enforcing royalties launched by Opensea, the NFT community has experienced a huge gap in product experience, and has begun to widely discuss Opensea's behavior.

Opensea's on-chain royalty enforcement tool stipulates that if NFT project owners want to collect royalties on Opensea, they must use Opensea's mandatory royalty contract, but this contract will blacklist all platforms that offer custom royalties. If the NFT project owner is unwilling to blacklist other trading platforms, then Opensea officials will directly reduce all royalties generated by the project owner on Opensea to 0.

For example, the NFT Valentine series recently released by Homa, a mobile game developer that recently completed a financing of 165 million US dollars, was first launched on the trading market. Users could freely place orders on multiple platforms, and buyers could also freely set royalties. But then Opensea banned contracts on other trading platforms, making it impossible for users to trade or place orders on other platforms. As a result, Homa holders reduced the price of Homa collections that had been listed on other platforms before the ban to 0, in order to silently resist Opensea's forced ban.

Why did Opensea launch a tool to enforce royalties?

Become a standard setter in the NFT field

NFT royalties can be written in the code layer, and engineers can simply include the royalties in the NFT's transferFrom() function. However, this will require that royalties be paid for any transaction of NFT collections. For example, you need to pay royalties when transferring your NFT from one wallet to another, or when giving it to someone else. Therefore, current NFT trading platforms have been using their own off-chain systems to track and pay royalties. The methods between platforms are not interoperable or unified, and there is no royalty standard.

However, some trading platforms have started to make a fuss about royalties. Since X2Y2 launched custom royalties, LooksRare no longer supports creator royalties but shares 25% of the agreement income with creators. SudoSwap adopts a zero royalty strategy, and Blur, which is aimed at professional users, also supports traders to customize royalties after its official launch. Many deep users of the NFT community feel that there is no need to open Opensea to trade. Opensea's market share has gradually decreased from the previous monopoly. According to data from NFTGo, a one-stop NFT analysis platform, Opensea's 30-day transaction volume accounted for 44.8% of the NFT market.

Faced with the threat of growing user groups and transaction volumes in other trading markets, Opensea hopes to launch mandatory on-chain royalties, using its current position of still occupying the main transaction volume in the market to force NFT project owners and creators to make a choice. In order to obtain royalties, project owners have to choose Opensea's on-chain royalty tool and blacklist other custom royalty platforms.

First-rate companies set standards, second-rate companies build brands, and third-rate companies make products. In the long run, Opensea will have a new round of voice in the NFT field and become a company that sets standards for the industry.

Using royalties to pursue a monopoly

According to Opensea's official information, it hopes to invite more creators to enter the NFT field and first implemented off-chain royalties. After other platforms launched custom royalties, Opensea observed that the royalty payment rate dropped to 20%, which could not support the creators' creative motivation, and the creators could not influence their royalty income off-chain.

Opensea hopes to achieve balance by giving creators more rights and equipping them with tools to control their business models, so it changes off-chain royalties to on-chain royalties.

At first glance, Opensea seems to be making changes for the development of the industry, but in the eyes of many project owners and community users, this is actually a selfish monopoly under the guise of royalties. As mentioned above, if project owners or creators want to use Opensea's on-chain mandatory royalty tool, they must agree to Opensea blacklisting other trading platforms. Opensea's behavior is very similar to the behavior of e-commerce companies forcing merchants to choose between two options before Double Eleven. Moreover, this behavior is completely centralized and does not care about the open source spirit of Web3.

Opensea's logic of simply serving NFT project owners or creators to control business models is also untenable, because the community unanimously believes that Opensea's move is a monopoly move after being threatened by its peers' first-class products and services.

What impact does Opensea's mandatory royalty tool have?

Other trading platforms have no choice but to compromise

As mentioned above, Opensea's market share continues to decline, but it still occupies the main market and has a voice. NFT project owners and creators choose to stand with Opensea, which reduces the asset targets of other NFT platforms. According to data from NFTGO, a one-stop NFT analysis platform, since the launch of the Opensea chain's mandatory royalty tool, the daily transaction volume of the X2Y2 platform, which first launched the custom royalty, has dropped from 1974ETH (November 1 data) to the current 900ETH (November 19 data).

As a result, other trading platforms have also compromised to the current market feedback. X2Y2 officially tweeted that it was once believed that the best way to deal with royalties was to give both creators and traders the right to choose, which is the basic principle behind the X2Y2 custom royalty function. Since Opensea released OperatorFilter (on-chain mandatory royalty tool), most new projects support it. "Code is law", X2Y2 respects the law. X2Y2 used OperatorFilter to remove the "custom royalty" setting for all newly listed NFTs.

Market liquidity is shrinking

In August, PANews experienced and summarized the fees, royalties, platform features, etc. of the existing mainstream NFT trading platforms. From the summary results, we can see that the transaction fee of Zora is 0, the fee of X2Y2 and SudoSwap is 0.5%, and the fees of other NFT trading platforms range from 2-10%. In addition to the 5-10% royalties set by most current NFT project parties and creators, the additional cost of a user transaction is as high as 7-20%.

Such high transaction friction greatly reduces the transaction willingness and frequency of users. When the transaction willingness and frequency are greatly reduced, how can the NFT project get more royalties? Moreover, the transaction frequency is also a process of community consensus exchange and expansion. In the long run, such high transaction costs are not conducive to the expansion of the NFT market in terms of scenarios and users, the precipitation of consensus and value, and are contrary to the overall booming development of the market.

It is foreseeable that one of the future development directions of the NFT trading market is to reduce the transaction costs of users. On the one hand, the evolution of the market forces the platform to reduce the handling fee. For example, platforms such as Opensea charge users up to 2.5% handling fee. On the other hand, the royalties of NFT collections are reduced. Currently, most project parties set a royalty of about 10%, which makes many project parties highly path-dependent. PANews has written and compiled about how NFT project parties and creators can expand their profitability by expanding business models and making the pie bigger.

Innovation in the NFT market will be suppressed

Previously, Opensea has always occupied user awareness due to its first-mover advantage, but the product has almost no optimization, resulting in poor NFT user experience. Later, other NFT trading platforms gradually occupied a certain market share through operation and improving product experience. Now, NFT aggregation platforms have also won market favor by integrating market liquidity. Various platforms continue to compete in a healthy manner, so that the real needs of NFT users are constantly met accordingly.

Now, Opensea has launched another monopolistic tool to make NFT project owners and platforms compromise. This move will suppress the market's innovation and desire for innovation. When entrepreneurs who want to build better products for the NFT market enter the market, they will think about whether companies like Opensea will violate the spirit of the industry and crack down on them when their products become popular, thus preventing the NFT market from flourishing.

As X2Y2 officials said, launching mandatory royalties is a simple decision and action. The NFT market has only been in operation for less than two years, and there are still too many tools and features to be built for the NFT space. But how much confidence does the industry have in innovation?

In this regard, dashuo, founder of CreatorDAO, an NFT secondary innovation community, said that the whitelist system will hinder innovation and it will be difficult for new trading platforms to emerge in the future. Because the filters of the on-chain mandatory royalty tool are completely controlled by Opensea itself, Opensea can completely ban competitors for any other reasons (politics, copyright protection, discrimination, etc.) in the future. X2Y2, Blur and other innovative platforms are forced to compromise, which is just the beginning. Innovation will become more and more difficult in the future. When innovation is exhausted, the entire NFT field will enter a vicious cycle.

Moreover, when the filter is controlled by Opensea itself, once it is exploited and used for evil, it can cause great harm. We have already seen the consequences of eating the forbidden fruit from the collapse of LUNA and FTX.