Hedera’s NFT implementation removes the intermediaries and enables true decentralization
Hedera implements NFT royalties enforced at the protocol-level, and that way puts the monetization of NFTs in control of the creators. The reason behind this design is that the current NFT royalty collection model is insufficient. Outside of NFT marketplaces, creators are unable to realize downstream sales profit of their works.
How NFT technology shifts the paradigm for royalties
It is unbelievable that almost all types of artists can profit from the resale of their work, except visual artists. Musicians, screenwriters, and authors can all benefit directly as original creators if their IP receives a secondary transaction.
However, most visual artists do not enjoy such easy access to royalty income from the re-consumption of their works. It is unhealthy that artists’ income ends after a single transaction of their creations, especially when the work’s buyer could sometimes benefit from the sale of these works.
The emergence of NFTs opens a new door to the above issue as it allows artists to participate financially and sustainably in their success.
Web3 technologies, including NFT and smart contracts, ensure the authenticity, provenance, and traceability of content, whether it is physical or digital work. In addition, smart contracts enable fair redistribution of royalties among all parties.
A good example is the generative art platform Art Blocks, which allows artists to set up sustainable royalty on secondary sales, thanks to smart contracts. According to DappRadar, the program has generated over $1.34 billion in volume to date. Of course, a significant part of this number represents the artists’ secondary market sales revenue.
While this is often hailed by NFT advocates as a revolutionary aspect of Web3, it does not accurately represent the entire experience for most NFT creators today.
That’s why Hedera wants to improve the situation at the protocol level. But before we dive into what makes Hedera NFT stand out, let’s look at how inadequate the existing NFT royalty rules are.
The current NFT royalty mechanics are not perfect
In August 2022, NFT marketplace X2Y2 cut out creator royalties and made them “optional” to attract traders, as this could help traders to earn more profit but hurt artists and creators severely. Unfortunately, such a strategy is no different from killing the goose for its golden eggs. Soon after, X2Y2 re-enforced royalty fees due to competitive pressure.
Royalties are not enforced at the protocol level on Ethereum, Polygon, Solana, or any other major blockchain that supports NFTs. As a result, creators are completely dependent on the NFT marketplace for this critical feature.
With royalty fees monopolized by centralized NFT marketplaces, creators have no final control over their content monetization. Without proper strategies to promote platform content, large marketplaces like OpenSea, LooksRare, and X2Y2 could easily lean toward the buyer side for the sake of revenue. And even if royalty fees become an unwritten rule in the industry, it does not fundamentally protect NFT creators.
How the current NFT royalty frame could affect the creator
Let’s take a look at a hypothetical example. Digital artist Alice creates a collection of 10 original pieces and mints them on Ethereum. Because Alice’s NFTs are on Ethereum, listing on a centralized NFT marketplace is her only avenue to receive royalties on her artwork.
In an effort to maximize her collection’s exposure to the NFT collector ecosystem, she decides to list them on OpenSea, the largest NFT marketplace today. Alice requests a 10% royalty every time her art is resold when she lists her collection.
However, if she decides she wants to instead sell her NFTs privately, no network functionality would allow her to programmatically implement royalty payments beyond the original sale. In fact, if that private buyer decides to list on a large marketplace, the buyer in question is the one that will be able to (potentially) receive royalties through reselling without needing to compensate the original artist.
This is true of Ethereum, Solana, Polygon, Cardano, BNB Chain, and Avalanche.
Hedera enforces NFT royalties at the protocol level
Hedera allows NFT creators to implement and hard-code royalty payments into their NFTs at the time of minting. This supports NFT royalty settlement even if users do not trade through a marketplace, i.e., by peer-to-peer sales.
This could be as low as 0.1% or as high as 90%. It is up to the artist to decide how much they believe they should be compensated for reselling their work. Furthermore, creators even can set multiple royalty fees set to pay out to multiple accounts at every resale. This type of creator empowerment is unprecedented in web3.
Why is Hedera NFT a game-changer?
Hedera enables the implementation of royalties at the protocol level, so that control is entirely in the hands of the NFT creator. No centralized marketplace has any control over NFT royalty fees on Hedera, allowing for true decentralization.
Sales can even take place privately from seller to buyer without any intermediary and with guaranteed royalty payments (assuming a mechanism is in place which allows individuals to list their creations for a set amount in a peer-to-peer fashion). As a result, the original creator will still receive royalty fees if the buyer resells the work after it has appreciated in value.
The rise of an artist and the fame of his or her artwork would very likely not occur at the same time. Many famous artists throughout history have died penniless, even though their artwork was eventually resold at incredible prices.
A collector successfully sold a work of Robert Rauschenberg, an influential modern artist, at auction for $85,000 about 15 years after acquiring it for a mere $900. This story occurred while the artist was still alive, yet he was still not compensated.
NFTs, in their current form, are subject to centralized entities and rely heavily on monopolistic marketplaces. Therefore, without any protocol-level enforcement of royalties, such a system is no different from today’s traditional art market.
How do programmable royalties come into play?
On the contrary, programmable royalties can mitigate the rampant profiteering of art by third parties and collectors, and continue compensation for the creators of the art themselves or their estates.
Most importantly, this change does more than just optimize royalties. The programmability implies its future potential to create a more well-designed system in which benefit distribution reflects collaboration and shared goals among artists, marketers/dealers, and collectors.
Watch the video below to gain deeper insights into Hedera NFTs.
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