Which projects will be significantly affected by OpenSea joining the optional royalty camp?

Author: Nancy, PANews

Recently, OpenSea announced that it will shut down its royalty enforcement tool "Operator Filter" on August 31 and will shift to implementing an optional creator fee model. This news immediately sparked protests from various parties, with BAYC's parent company Yuga Labs leading the resistance, stating that it will continue to protect creator royalties and will gradually stop supporting all upgradable contracts and any new collections on OpenSea SeaPort. So, why is OpenSea stopping the mandatory collection of creator royalties? And which projects will be significantly affected?

OpenSea's Controversial Shift from Mandatory to Optional Royalties

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

In simple terms, starting in March 2024, sellers will be able to decide the revenue share for secondary sales, and if they set the share to 0, creators will receive no earnings.

Specifically, the disabling of the royalty enforcement tool includes four main aspects: (1) The OpenSea Operator Filter will be disabled starting August 31, 2023; (2) For collections that enabled the OpenSea Operator Filter before August 31, 2023, and for all collections existing on non-Ethereum blockchains, OpenSea will enforce creator-preferred fees in all secondary sales from August 31, 2023, to February 29, 2024; (3) Starting August 31, 2023, buyers will find it easier to identify secondary sales listings that include creator-preferred fees; (4) Starting August 31, 2023, sellers will find it easier to choose creator-preferred fees or customize their creator royalty payment methods.

Although the Operator Filter launched by OpenSea in November 2022 aimed to restrict the secondary sales of creators' NFTs to NFT markets with enforced royalty mechanisms, filtering out platforms like Blur that offer optional or zero royalties, as mentioned in the tweet, the success of the Operator Filter relied on participation from everyone in the ecosystem, which unfortunately did not happen. In fact, while the Operator Filter allowed creators to blacklist NFT markets that do not enforce royalties, NFT markets like Blur and LooksRare circumvented the operator filter by integrating OpenSea's NFT aggregator Seaport protocol, thus bypassing the blacklist and avoiding creator fees. Additionally, in February of this year, OpenSea had already hinted at adjustments with the introduction of limited-time 0 fees, revised optional royalties (minimum 0.5%), and updated blacklists.

Meanwhile, OpenSea Pro (formerly the NFT aggregator Gem) announced that with the adjustment of creator fees, it will charge a 0.5% platform fee on all listings created on OpenSea and OpenSea Pro starting 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 adjustments to OpenSea's royalty structure are closely related to the market challenges it faces. On one hand, the bear market has led to a continuous decline in NFT prices and trading volumes, indicating a waning interest in trading among NFT traders, which has impacted the platform's revenue. Dune data shows that as of August 22, the weekly trading volume of NFTs has dropped over 96.9% from its peak of nearly $330 million in January 2021.

On the other hand, OpenSea's market share is being increasingly eroded. Dune data shows that as of August 22, OpenSea's weekly trading volume market share was only 22.8%, just one-third of Blur's, compared to a high of 95.6% in January 2022. At the same time, in terms of weekly trading volume, OpenSea's share was 57.6%, down over 63.6% from January 2022.

OpenSea's implementation of the optional royalty mechanism has also sparked numerous criticisms. For instance, Mark Cuban, owner of the NBA's Dallas Mavericks, stated on social media that as an investor in OpenSea, the platform's decision not to collect and pay royalties on NFT sales is a huge mistake that undermines trust in the platform and harms the entire industry; Phillip Kassab, head of NFT and game growth at Sei Labs, remarked that (the reduction of royalties by platforms like Blur and OpenSea) is a shortsighted strategy that ignores the fact that sustainable success in this field is built on a delicate balance of empowering traders and creators.

Major Projects at Risk Amid Royalty System Changes

In response to OpenSea's adjustment of the creator royalty mechanism, Yuga Labs was the first to protest. On August 19, Yuga Labs officially announced that it would gradually stop supporting all upgradable contracts and any new collections on OpenSea SeaPort.

In fact, royalties are a significant source of income for project teams, which is why various NFT trading markets often focus heavily on royalties. However, with the market downturn, creators' earnings are facing a substantial reduction. According to Nansen data, NFT market royalties fell to $4.3 million in July this year, a 98% drop from the peak of $269 million in January 2022, as transaction fees decreased from 5% per transaction to 0.6%.

What is even more detrimental for creators is that with OpenSea also shifting to an optional creator royalty model, it means that there is no leading trading platform in the NFT market supporting mandatory royalties. For example, platforms like Blur and LooksRare use an optional royalty model, while SudoSwap adopts a zero royalty strategy, among others.

According to data analyst @Panda Jackson's previous statistics, during the trial period of the Operator Filter (from November 8 to December 12, 2022), 31.6% of 2,215 new collections used mandatory royalties, with the adoption rate rising from 14% to 40% over four weeks, and nearly 80% of the total trading volume of new collections was contributed by collections with mandatory royalties. Moreover, data also shows that in transactions without mandatory royalties, only 0.8% of transactions complied with royalties, while in transactions with mandatory royalties, this ratio was 86.6%. This data indicates that without enforcing royalties, creators can hardly receive royalties, as royalties increase the cost for buyers. Although this data is not the most recent, it still somewhat confirms the importance of mandatory royalties for creators.

Faced with the situation where creators cannot continuously receive royalty income, which NFT projects may be more significantly affected? According to Definitive data, as of August 22, the top 10 NFT projects ranked by royalty income are BAYC, Otherdeeds, Azuki, CLONE X, Moonbirds, Doodles, Parallel, RTFKT-MNLTH, and VeeFriends. Among them, BAYC has a royalty income of $58.8 million, ranking first; Otherdeeds ranks second with $52.7 million; Azuki ranks third with $44.1 million; CLONE X and Moonbirds follow closely with $37.7 million and $28.1 million, respectively.

In summary, regarding OpenSea's royalty reform, some believe that the optional or zero royalty strategy may attract NFT traders in the short term, but in the long run, it will diminish creators' motivation to create, which is detrimental to the continued innovation and development of NFTs; however, others argue that the existence of royalties is detrimental to NFT liquidity and may lead to further losses for investors facing losses.