NFT Royalty Battle Caused by SudoSwap

Author: Zeneca

Source: Letters from a Zeneca_33

Recently, SudoSwap, an NFT trading market that focuses on "zero royalties", has become the focus of the NFT field, and has sparked debate in the community on the issue of royalties for NFT creators. There is no doubt that the rapid growth of a market like Sudoswap that does not support creator royalties, some people are happy and some are worried, but royalties are not a problem that can be solved by one side, and all forces in the NFT field are wrestling with each other.

We start by acknowledging that creator royalties are one of the cornerstones of the entire NFT space. This is especially true for artists. We must work hard to cement and maintain this culture of support for creator royalties. Yes, it is culture, not system. Because, at the smart contract level, royalties are not enforceable. For creators to get royalties, people have to be willing to pay royalties themselves.

In addition, the status of creators in different categories is unequal: 1/1 artists, teams releasing 10K PFP projects, teams with VC support. The distinction between them also and already influences the market's decision on whether to pay creators royalties.

Royalties cannot be enforced at the smart contract level

A very common misconception is that creator royalties are hardcoded into smart contracts and permanently enforced on-chain every time an item is sold. This is totally false. I believe that many people will be very shocked when they realize this.

For artists, one of the biggest selling points is the promise to receive royalties on their work forever. However, this is not enforced on-chain, but is done at the market level. If you sell an NFT on OpenSea, OpenSea receives royalties and sends it to you. They must support royalties. We generally rely on third-party centralized entities to perform royalty payments.

Also, a lot depends on whether creators set their royalty rates on the platform. If they forget to set the royalty, they won't receive the royalty income. There have been some significant developments in this space over the past year, such as the introduction of on-chain elements (i.e. EIP-2891), most notably manifold.xyz’s efforts with the Royalty Registry.

Rather than requiring creators to go to each individual NFT marketplace and set their royalties, they can include this at the smart contract level, which the marketplace can then look up, and automatically set + redeem royalties on their platform. EIP-2891 has become a standard adopted by most major NFT markets, which is already a big step forward.

The crux of the matter, however, is that the market must still agree to abide by the standard. Royalty payments cannot be enforced if someone decides to trade with someone over-the-counter without using the market. If there is a market for creators not being paid royalties, no one can stop it. Sudoswap is such a market.

You might think that Sudoswap will cause public outrage by doing this, and it will eventually eat its own fruit, and no one will use this market anymore. In fact, it's only half right. It is true that this approach will cause dissatisfaction among many people, but never underestimate the greed and profit-seeking nature of human nature. This is exacerbated 100x especially when you can transact anonymously.

Source: Dune by 0xRob

In comparison, OpenSea, LooksRare, and x2y2 have done about 8,000 ETH, 2,100 ETH, and 1,000 ETH respectively in the last 24 hours (wash trades excluded):

Source: NFTGO

Although it seems that Sudoswap's transaction volume accounts for a small share of the total NFT market, its growth rate cannot be underestimated.

Let's take a look at the types of NFT collectibles that users trade on Sudoswap:

Basically, all trading activity so far seems to be on large collectibles, whether they are PFP items or membership items. Only a handful are the work of some 1/1 artist.

Why is someone trading these collectibles on Sudoswap? There is no exact answer, but one thing is clear, there is a correlation between the size of the collection and the likelihood of finding a trader willing to circumvent creator royalties.

This also raises another important question:

The difference between collectors and traders/investors. Yes, many people are both, but many also consider themselves trading NFTs purely for the money, with no interest in collecting or supporting artists/creators. It's a bit sad, but it's an undeniable reality. Ignoring it won't make this reality go away. These people exist, they are part of the market, and they account for a significant portion of the trading volume of large NFT collectibles.

For these people, they will go to the place with the lowest fees to trade NFT. They trade high frequency, look for arbitrage opportunities, and move in and out of projects and positions to maximize profits. This gives Sudoswap a competitive advantage over other royalty-supporting marketplaces. As a community, we can resist Sudoswap, we can say we hate it, we can refuse to trade on it - but only a few can resist the trend, and suddenly there will be new series of NFTs traded there market. When collections of NFT collections in the tens of thousands are held by thousands of individual individuals, it is clear that many of these individuals will always be there purely to make money.

We can look at this example. Now, if I want to buy an Azuki NFT, the lowest price from OpenSea, LooksRare and x2y2 is 7 ETH, at this price, there is only one option.

Source: Blur.io

Alternatively, I can go to Sudoswap, choose between 16 different Azuki, and pay 6.639 ETH, which equates to a 5.16% discount. As a buyer who only cares about profit, it seems that I would choose Sudoswap without thinking, doesn't it?

What if I am a seller? I can sell my NFT on Opensea, in which case I pay a 7.5% fee (2.5% to OpenSea + 5% to the creator). So if I sell my Azuki for 7 ETH, I end up earning 7 - 0.525 = 6.475 ETH.

However, if I sell on Sudoswap for 6.639 ETH, the total fee I have to pay is 0.5%, and the final income is 6.639-0.0332 = 6.606 ETH.

So, on Sudoswap, as a seller you can list at a lower price and still earn more.

Of course, if the NFT is listed on x2y2 for 7 ETH, it will be slightly better for the seller, but this does not take into account the incentive factor that the buyer's probability of buying at a lower price point will be greatly improved.

All of this should emphasize that there is a significant gap, and when you can remove the 2.5-10% creator royalties, the economic incentive for traders to trade on the market without fees becomes huge .

What these examples highlight is that when we remove the 2.5%-10% creator royalties, there is a significant gap and the economic incentive for traders to transact on the market without incurring additional fees becomes very large .

Appeals alone won't stop people from using Sudoswap. Traders are profit-seeking and ruthless, and the presence of anonymous trading and trading bots exacerbates this trend.

In addition, there are problems with the transfer of stolen assets in such markets. We currently don’t know if or how Sudoswap will handle reported stolen items, but you need to be extra careful if you’re buying NFTs here.

What should we do?

Beeple tweeted: "I think the creator royalty debate is actually much simpler than people think. There is technically zero possibility of forcing royalties. So creators have to build a pro-royalty collection The basics...it's as simple as that."

Overall, as a community, we want to pay our creators royalties. I believe this is especially true for 1/1 artists, but also for generative artists and individual creators who are not part of huge teams. Most collectors who buy NFT artwork are unwilling to support the artist and pay royalties. We hope that sellers can contact artists and pay them royalties despite the countless transactions of high-value assets that happen off-site without using the NFT marketplace.

It's a cultural thing, a social contract. We, NFT collectors, choose to pay our royalties. We chose to use a marketplace that supports royalties. We must continue to advocate for creator royalties, and pay artists, or we will not be able to accomplish one of the most beautiful things in Web 3.

I sincerely believe that we can maintain this spirit and culture throughout. It's so ingrained in our community that many people don't even think it's going to work without paying royalties to artists. This is very similar to the American tipping culture. Tipping is not mandatory or enforced by law, but it is a general rule and the vast majority of people will pay at least a nominal/standard tip.

We need to continue to promote the culture of paying royalties to artists in web3. For art, collectors, and small collections, I think this kind of initiative is feasible, but for 10K large projects, it is a question mark.

Why would the 10K program be any different?

Here, "10K" is used to indicate a large NFT series in general, which may be 4K, 8K, 15K, 50K, 250K. They're not like other NFTs because, at least right now, the vast majority of people who buy, hold, sell, and trade these NFT collectibles do so for monetary gain, not to collect or support the creator.

And then, of those people, there's always a small minority who don't want to live up to the social contract and royalty culture. That means there will always be some level of demand in these 10K series, to be traded in a market that doesn't support creator royalties.

It all also highlights a huge problem with the whole creator-royalty model of these large collections, especially ones with roadmaps. It is in their best economic interest to increase secondary market activity. Greater volume means more profit.

Otherwise, why do all these programs have a "delayed disclosure" period? Occasionally it's for finishing artwork, or for non-malicious reasons. But for the most part, it's to build hype and secondary market activity. People speculate, the volume is high, and the market finds the "pre-disclosed" price. Then, the disclosure happens, and there is a cascade of further activity as the price (usually) falls and the market discovers the "post-disclosure" price. Collectors collect, traders trade, speculators speculate, gamblers gamble, and project parties earn fees from each transaction.

It's also good for the project if they announce any news to affect their floor prices. Whether it is rising or falling, what is more important is that there is activity. Or even better, if they can announce something to drive down floor prices, and then announce some positives a few weeks later to boost floor prices. I'm not saying that all, or most, or many projects are doing this on purpose - but in the short term, the temptation to do so is too great.

Why are project parties tempted by such short-term interests to destroy their own holder base? Shouldn't they value the long-term win-win situation?

I understand it's good that a project receives ongoing royalties to pay for maintenance and allow them to build projects for the benefit of the community at large, but I just think the whole system is a little flawed.

It is also intimidating for those who lose money from a project they lost faith in to choose a deal that does not pay royalties. I'm not advocating that anyone should bypass royalties just because they lose money on a trade, but I would say that people are more inclined to do so.

Such incentives are so strong that people are reluctant to continue paying royalties. At this time, everyone will flock to Sudoswap's NFT AMM model.

Summarize

That being the case, what should we do? As stated by Beeple quoted above, the easiest way is that "creators must build a base of collectors who support royalties". Still, the relationship between creators, royalties, collectors, traders, speculators, and teams needs to be thought deeply. Every current and future project founder and NFT collector needs to be proactive and consider this.

This topic will continue for a long time, and we hope to see more explorations and experiments.