On Royalties and IP Rights In Web3

Open editions were the most insane meta of 2023 so far. For the first time in my life, I watched an artist print over $2 million out of thin air. It felt empowering, thought-provoking, and ludicrous all at once.

The “starving artist” archetype was put to bed. I mean, sure, millions of artists are still broke, but this time an artist created generational wealth without the help of institutions. No gallery shows, no big-name curators—just a Twitter page with tons of followers and a Manifold link.

What created the demand?

Burn mechanisms allow buyers to claim more exclusive editions of a work by actively contributing to its scarcity, which has allowed open editions to flourish. It was a masterclass in IP and economics made possible by blockchain technology.

You see, the demand was tied directly to the scarcity created by people burning common editions for rare ones. This drove up the value of works created by the artist, a.k.a. their intellectual property. Add a sprinkle of FOMO and some Twitter savvy, and voilà! The money printer shivers.

Unless you’ve been living under a rock, you saw and felt the effects of the $BLUR token airdrop on the NFT market. People reinvesting free money into the ecosystem drove up floor prices. It was encouraging to see a significant stakeholder contribute so generously to the community.

While retail traders were enjoying the high, Blur's biggest rival was beginning to feel the heat. OpenSea’s smart contract was designed to blacklist zero- and flexible-royalty marketplaces. This was a measure to ensure the protection of creator royalties on their platform.

It was a simple way to stop OpenSea listings from being aggregated on platforms that would not pay royalties. It worked up until Blur discovered and exploited a loophole in the SeaPort contract to bypass this rule.

With Blur becoming the belle of the ball, OpenSea chose to pivot in their direction. If you can’t beat them, join them, right? So they announced a new policy that softened their former stance on creator royalties.

But it doesn’t end there. Blur claimed that OpenSea made creators choose between receiving royalties on either platform but not both. There's nothing like a good ol’ game of corporate ping pong to determine how to actualize your IP rights, right?

OpenSea had a monopoly over 90% of the market volume for the past two years. Blur’s aggressive marketing tactics shook things up in the last three months. They had to be doing something right. Was it flexible royalties?

To base such a bold statement on what is essentially an assumption is a little careless. Blur's success is not entirely due to optional royalties. They ran a brilliant marketing campaign, enticing people to trade large amounts of ETH on their platform.

Blur also addressed numerous flaws that OpenSea neglected to fix while they dominated the market. There's a reason why the platform is jokingly called "BrokenSea," after all.

A quick flashback to Q4 2022, when a drama of a similar nature occurred on Solana. The storyline was uncannily similar, with the main characters repeating the same phrases. We love creators, but they made royalties optional and stole all our customers.

Some claim that Solana NFT marketplaces resolved the controversy by enforcing protocols like Metaplex. Heck, during the ensuing drama, Metaplex even shouted out to creators on ETH.

The data, however, strongly suggests the opposite.

Traders in a free market will exhaust every avenue to maximize profits. This rings true for both institutional stakeholders like NFT marketplaces and retail money, i.e., their customers.

In Web3, certain costs like gas, exchange, trading tax, and marketplace fees cannot be cut. This is because the smart contracts that allow for trades to take place on the blockchain have them programmed in. One small expense, however, appears to be unimportant and can be skipped.

Creator royalties must be given the same standing as these previously mentioned "operational costs." Without the creators who provide the commodity for NFT marketplaces to grow and retail traders to pump their bags, we might as well be spending money on a bunch of zeros and ones.

By normalizing the demise of creator royalties, we ignore those who fled exploitative Web2 systems for the openness and independence of Web3. Most of the industry was built on their backs, and now they get the short end of the stick?

It is possible that NFT projects with unviable business models will be filtered out by flexible royalty policies. But it also makes it harder for community-driven projects to flourish. Even the most successful NFT brands, such as DeGods and Doodles, started out farming royalties on high-ticket trades.

It’s become clear that NFT marketplaces will toss creator rights overboard once their market share starts to sink. Their lack of discretion caused an almost identical pattern to play out in two separate blockchain ecosystems within six months. This is not a coincidence, and we don't want to see this pattern persist in the market.

If NFT marketplaces are left to their own devices, they will burn down the entire industry on the altar of profits. Web3 has once again demonstrated how, in the absence of a regulatory system, industrial structures will collapse under the weight of competing and conflicting interests.

Enter, Lady Justice, the great equalizer.

Intellectual property rights are set to become one of the most contentious legal issues in Web3. This illustrates the close connection between blockchain technology and the creator economy. The stakes are simply too high to ignore the fact that we are at a critical turning point.

Last week, a jury trial was concluded in a dispute between an international fashion brand and an NFT creator. A court determined that an NFT design violated the IP rights of a well-known international fashion brand in the U.S. case of Hermès International et al. v. Mason Rothschild.

This could mark the start of a lengthy train of judicial precedents on the scope of intellectual property rights on the blockchain. Consider this to help put things in perspective further: On the same day as the Hermès ruling, Burberry, another global fashion brand, was denied metaverse trademark rights by the European Union IP office.

There is a clear trend here. Large creative brands have realized the value of IP rights in Web3 and are taking action to protect theirs. The law will gradually develop a framework for determining these rights. However, smaller creators' access to their intellectual property rights is being restricted by corporate interests.

For the little guy standing up to a Goliath who bows only to the forces of business, the law is probably the best slingshot available. NFT marketplaces should be legally compelled to adopt less draconian policies on creator royalties.

Maybe they would focus more on customer incentives and product design. Maybe bootstrapping creators would have a chance at competing with their VC-funded peers. Maybe retail traders who survived 100 gwei gas fees wouldn’t be bothered about paying royalties. Just maybe.