This post is a companion to our marketplace launch announcement. In building our marketplace, on behalf of the community we did a deep-dive on royalties to bring transparency to them and hold ourselves accountable. See our public Dune dashboards, on which this analysis is based, here.

Quick summary:

• Effective royalty rates for Ethereum NFTs have taken a nosedive in the past two years. Today, the average rate is about 0.8%, down 84% from about 5% just two years ago.

• Artists and creators have missed out on roughly $37M in payouts in December of 2023 alone when benchmarking against 2021 effective rates.

• OpenSea is still enforcing royalties for a handful of projects, propping up the average rates, but that will end on Feb. 29. When it does, we believe this will send effective royalty rates down near Blur’s 0.5% minimum.

• Effective royalty rates for art are significantly higher than other types of projects, showing signs of a collector desire to build a positive-sum ecosystem.

The promise of blockchain royalties, once a central pillar of the argument for blockchain art, has eroded substantially over the past two years. LooksRare launched in January of 2022, followed by X2Y2 and Sudoswap in March and April of that year—each of which either removed royalty enforcement, or removed royalties altogether. Blur launched its marketplace without royalties in October of 2022, and its token in February of 2023. OpenSea quickly followed suit by dropping royalty enforcement. Each of these produced significant and sustained drops in effective royalty rates. The decline is substantial and obvious in the data. Today it averages about 0.8%, down 84% from about 5% just a few years ago.

Total royalty earnings are down tremendously relative to former market highs. In December of 2023, about 3,339 Ether were paid out to artists and creators ($8,315,512.38 at current USD rates). Compare this with the all-time high in January of 2022 of 91,982 Ether ($229,418,744.94 at current USD rates), about a 96% decrease and an absolute decrease of over $200,000,000.

These absolute figures are shocking, but of course speak to overall market trends—overall volume is down significantly—more than they do to royalty rate erosions specifically. But even correcting for current market conditions, if we assume a 5% royalty—approximately the 2021 standard—in present day market conditions, we can see that creators and artists missed out on roughly 15,100 Ether in payouts in December of 2023 alone. That’s a present day USD value of $37.6M.

In February of this year, things will get even worse as OpenSea stops enforcing royalties on the select projects that implemented their Blur-blocking mechanism, known as Operator Filter.

Despite the pronounced downward trend, the specifics do vary in interesting ways, mostly according to project type. We’ll take a dive into these differences, but before digging in let’s review the current context.

Royalties Today

While platforms like LooksRare, X2Y2, and Sudoswap played significant roles in the market shakeups that have resulted in severe losses in effective royalty rates, the vast majority of secondary volume today happens on OpenSea and Blur. OpenSea removed royalty enforcement in February of 2023, but then decided to add enforcement back for projects that either implemented the Operator Filter prior to August 31, 2023, or were created on non-Ethereum blockchains prior to that date. This means that today, a small set of projects have retained royalty enforcement on OpenSea. But OpenSea will stop enforcing royalties altogether on February 29, 2024 for all collections. Read the OpenSea blog post for more information. In terms of UX, OpenSea defaults to setting the creator-specified royalty in the UI until the lister changes it.

Blur will enforce a minimum royalty of .5% for collections where a royalty is established on all marketplaces (PSA—if you don’t have royalties specified on all marketplaces, including Blur, LooksRare and x2y2, go set them to get that Blur minimum royalty enforcement). Otherwise, Blur also allows royalties to be set to 0%.

However, Blur will also respect full royalty enforcement in one specific case: ironically, for projects that tried to block them with the Operator Filter. Blur seems to have found a way around the Operator Filter, but it requires them to also enforce full royalties. These projects have a “permissioned” flag in the Blur interface.

Deep Dive by Project Type

PFPs

As mentioned, there is a downward trend in effective royalty rates overall, but this change is most pronounced for high-profile PFP projects like Azuki, Bored Ape Yacht Club, Cryptoadz, and Milady. While these projects once enjoyed royalties of 2.5%-5%, they now average less than even the Blur minimum of .5%. Some weeks Azuki is even in the .0x% range.

Art

Art, however, fares better than PFPs. This is likely due to some combination of shared communal norms and the desire on behalf of collectors to support individual artists. You can see that while the handful of key art projects sampled (including several Art Blocks projects) once enjoyed royalties even higher than PFPs, they now hover in the 1.5%-2.5% range, some weeks even higher.

Marketplace Comparisons

The OpenSea effective royalty rate across all projects still hovers around 2%. On Blur, it’s around .4%. However, given that in February of 2024 OpenSea will stop enforcing royalties on all projects (even the ones created on non-Ethereum blockchains or that implemented the Operator Filter prior to August 31st, 2023), we can expect this to change substantially.

Below is a chart which shows effective royalty rates excluding projects earning more than 5% effective royalty rates. We weren’t able to reliably exclude royalty-enforced projects from our query, but I believe this is a good enough proxy given that according to the data 5% is likely too high to expect all participants to comply with out of good will. With this filter applied, average effective royalties on OpenSea drop by more than half, to .75%. This gives us a rough picture of where the royalties average on OpenSea will be once they drop all enforcement in February.

Conclusion

We’re likely never going to put the genie back in the bottle, but there are strong signs that collectors, particularly art collectors, want to participate in a positive-sum ecosystem, and are willing to spend more than is absolutely required of them to support artists.

We believe that with some additional guardrails and nudges in place, we can reinforce some of these existing behaviors, despite the fact that we can’t truly enforce them. Based on our review of the data above, we believe it’s reasonable to aim to 2x-3x the effective royalty rate paid to our artists.

To bring this closer to home for us, we put together an index of 10 representative projects on Highlight and evaluated their average effective royalty rate. Today it sits at .8%. We’d like to move that number up above 2%, and we’re building our marketplace with this as a top priority.

If you have questions or ideas about the data analysis above, please reach out to us. If you’re interested in learning more about the Highlight marketplace, check out the blog post here.

This analysis is intended to be used for informational purposes only and is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness or timeliness. Although we work hard to ensure all information is accurate and from reliable sources, we make certain assumptions, and we are not responsible for errors and omissions or any results obtained from the use of this information