As the NFT ecosystem continues to evolve, free or low-fee markets are emerging, leading to reduced royalties for many creators on secondary sales.
The challenge, therefore, is to generate sustainable income in this new environment where royalties are trending downwards.
The good news is that NFT creators can employ various strategies to offset the declining royalty income.
In this piece, I’ll share four avenues creators can take to better position themselves in this ever-changing NFT royalty landscape.
As DCinvestor has previously explained, NFTs are best understood as “permissionless, censorship-resistant, pseudonymous assets.” In other words, NFTs are decentralized digital items that can be moved directly between individuals without the interference of centralized intermediaries.
Due to the recent decline in royalty payments driven by the NFT market war between Blur and OpenSea, some methods, such as preventing transfers, burning tokens from non-royalty payers, and market blacklisting, have been proposed as potential ways to halt the decline in income.
The issue with the above methods is that they are all centralized strategies, eroding the fundamental value proposition of NFTs as decentralized pseudonymous assets.
Nevertheless, when it comes to compensating for declining royalties, NFT creators still have a range of options to consider.
1) Suppress Supply
The first and most basic method that creators or collection teams can consider is to retain some supply of NFT projects for themselves. As the project develops, this reserved supply can be used for primary sales later on, either through further financing over time or as part of a broader IP deal, as Larva Labs did in 2022 by selling its CryptoPunk supply to Yuga Labs.
This strategy has two general variations: retaining unminted supply (think on-demand minting series like Chromie Squiggles, where +250 NFTs can still be minted for special occasions within the series’ maximum supply) or retaining minted supply (e.g., Larva Labs minted the first 1000 NFTs from the CryptoPunks smart contract and sold them over time).
However, just because a project retains some supply for itself doesn’t mean it can’t attempt to earn royalties, even if they have recently been trending downwards. For example, the creators of Terraforms took a zero-royalty approach, choosing to retain unminted supply for later primary sales and to maintain consistency with the community in the long term, while the goblintown.wtf team retained 1000 NFTs when they offered free minting in May 2022 and started charging a 7.5% royalty on secondary sales (later transitioning to their custom marketplace, enforcing a 5% royalty).
2) Become an LP with Supply
In the NFTfi space, there is a growing trend of NFT automated market maker (AMM) protocols where creators or projects can provide NFTs to earn trading fees from providing liquidity.
The key is that projects can add their NFTs to liquidity pools and earn a share when people buy and sell through the team’s liquidity. An interesting advantage of this strategy is that it allows a team to earn income from their NFTs without having to conduct primary sales.
For example, the Sappy Seals team obtained 50 of their own NFTs and began LPing with them on sudoswap in August 2022. Since then, the team has earned thousands of dollars in income from trading fees. Other projects that have used this LPing strategy with similar success include Based Ghouls, Finiliar, and Allstarz.
Another more advanced variation of this method is LPing in an Abacus spot pool, but there are currently no examples of this. Abacus is a new NFT valuation protocol focusing on pricing NFTs. The team has proposed a new NFT LPing approach, where projects link some of their treasury funds to their own liquidity pool on Abacus to generate income and ensure accurate pricing for all NFTs in the pool. Learn more about this concept here.
3) DIY Market
Sometimes, when you need something done, you have to do it yourself. In the contemporary NFT market space, projects looking to enforce royalties are increasingly rolling out their own native markets and concentrating activity there to attract trades from unreliable places like Blur, OpenSea, and the like.
Fortunately, NFT infrastructure projects like Reservoir are making it increasingly easy for creators and collections to deploy their own custom, royalty-friendly markets and provide aggregated NFT listings.
For example, Finiliar used Reservoir to power its native market system on finiliar.com. They set up the front end the way they liked and Reservoir took care of all the actual market behavior.
4) Incentivize Royalties
Despite the recent general decline in NFT royalties, that doesn’t mean we have to give up hope entirely. In fact, one available method is to increase royalties through direct incentives.
There are many different ways to achieve this incentive. For example, NFT teams can use an indexing system to identify all the collectors who have cashed royalties in the past year and then roll out unique benefits for these supportive collectors, such as whitelisting, NFT airdrops, chat with token thresholds, leaderboard competitions, and more.
This approach is interesting because it can easily be used in conjunction with the above methods (e.g., suppressing supply, focusing on DIY markets) and can guide NFT holders to become more active and helpful community members!
