DeFi: Yuga Labs and Magic Eden's royalty focussed marketplace
Two of the biggest names in NFTs have teamed up to create a new marketplace and smart contract that will leave no escape from royalties.
Gm Fintech Futurists —
Today we highlight the following:
NFTs: Yuga Labs and Magic Eden team up to create an NFT marketplace with obligatory royalties (link here)
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NFTs: Yuga Labs and Magic Eden team up to create an NFT marketplace with obligatory royalties (link here)
NFTs are mere JPEGs to the mainstream. But they are actually far more important — digital objects with emerging venues for commerce, like OpenSea and Magic Eden. Think eBay for Web3, with all the network effects and payment processing that entails. The standards that emerge around that commerce are being fought over now.
Yuga Labs, creators of the Bored Ape Yacht Club and owner of CryptoPunks, and Magic Eden, a multi-chain NFT marketplace, have partnered to create a new Ethereum NFT marketplace with a target launch at the end of 2023. The platform will enforce royalties on every NFT sale, which typically range from between 2.5% to 10% of the sale price. Magic Eden is an OpenSea clone that was initially Solana-focused. It launched an Ethereum marketplace in autumn 2022, but has since sunset the product, which will now be replaced by the new platform.
While royalty fees were initially honored by marketplaces in the space, the trend has moved away from this model. The reason? Fierce competition for traders in a suddenly shrinking market. As NFT sales dwindled in the second half of 2022, some platforms opted to allow traders to bypass these fees in a bid to attract buyers.
OpenSea, the world’s largest NFT marketplace, hopped on the trend of making royalties optional in August, despite previously stating they would honor the fees. Magic Eden also changed to optional royalties last year, but have since changed their tune following their role in the Open Metaverse Alliance of Web3 (OMA3), a working group anchored by Yuga Labs that aims to improve royalty standards and enforcement.
Magic Eden will implement a new smart contract that will enforce royalties on all trades. Other marketplaces will be able to use the same smart contracts, and new NFT projects will be able to mint their collections with them as well. Potentially, traders and NFT enthusiasts opting to use marketplaces who do not use the contracts may be penalized — e.g., Yuga may withhold future benefits for NFTs bought without paying royalties. That doesn’t sound all that persuasive to us, but perhaps it is technically possible to implement.
The news comes as NFT trading volume reaches a 3-month high, in large part due to a seven-figure cryptopunk sale to none other than the creator of Yuga Labs. But that does not signal long-term sustainability, but more likely continued fighting over scraps.
Traditional visual art does not have royalties for the artist, and Yuga Labs, the firm proposing this change, is not a single artist but a corporation subject to the whims of investors looking for the company to make higher returns on its collections. Does enforcing royalties really benefit artists, as the proposal claims, or does it generate more revenue for corporations in the space?
From a trading perspective, enforcing royalties makes each trade less profitable. Traders have to resell for (1) the initial buy price, plus (2) royalties and (3) exchange fees, just to break even. This means professional traders will look for venues where they can avoid royalties, or even make money from just wash trading (e.g., see Blur). Artists, on the other hand, see royalties as an incentivize to maintain and promote prior collections rather than churn out new art. But with asset prices depressed, the value from royalties to artists is also insufficient to make a real living.
Trading and issuance are the lifeblood of market venues. Just this month we witnessed OpenSea cut 50% of its staff. Magic Eden and Yuga are under pressure. Playing with value distribution is unlikely to create enough value. Alternately, we would just standardize royalties at 50 bps — call it an art portfolio management fee — and call it a day.
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