All year round, different museums and art galleries hold art exhibitions where artists get to display and sell incredible art collections.
Great as this is, it’s been limiting for both art lovers and artists globally. Only a limited demographic of people have been able to see and purchase these art pieces from museums and art galleries.
That’s where digital collectibles come in.
Being unique and borderless, museums and art galleries stand to gain a lot from it.
With digital collectibles, museums and art galleries can provide an immersive experience to more people worldwide. For instance, with a virtual reality headset, users can experience rare art collections and bask in the stories or history surrounding them. This will surely increase the reach of these museums and art galleries beyond a limited demographic.
That’s not all. With digital collections, the revenue strength of museums and art galleries is bound to increase.
How you ask?
Museums and art galleries will get more revenue from selling these works of art. This is likely to be because of increased bids. Also increased revenue is guaranteed from the royalties these digital collections rake in as they become more popular. Testament to this is Yuga Labs, the blockchain company behind the Bored Ape Yacht Club and other NFT collections, that have made a whopping $147.6 million in royalties. Therefore, keying into this is sure to benefit museums and art galleries.
Great as the benefits of having digital collectibles might be, particularly concerning royalties, serious debates have been on them.
The Digital Collectable Debate
It has been established that at the smart contract level, it is not feasible to incorporate royalties. This would compromise the self-sovereignty of digital assets. So instead, marketplaces have been enforcing them. This is where debates have sprung up. These contentions have bordered on whether marketplaces should enforce royalties on digital collectibles sold or they should scrap them altogether.
On one end, those who favour scrapping royalties on digital collectibles have labeled royalties as exploitative and unnecessary.
Likely to support this, marketplaces like the DeGods ecosystem recently removed royalties from all their affiliated digital collections (DeGods, y00ts). Similarly, some lesser marketplaces like x2y2 have also followed suit. Sudoswap has also joined forces with those against royalties to attract as much liquidity as possible. Solana NFT marketplace Magic Eden seems to be sitting on the fence as they have made all royalties on their platform optional despite announcing MetaShield, a controversial tool designed to improve enforcement of royalties, in September 2022.
Supporters of royalties being exploitative and unnecessary could have a point. The instance where Goblintowns quietly programmed a high 7.5% royalty on all secondary sales on their platform for a collection that was nothing more than a meme lends credence to this. This high royalty fee netted the Goblintown team ~$7m in revenue for a collection that didn’t add any particular value.
Metaverse collection, NFT Worlds also had a 9.5% royalty in what could be one of the highest for a prominent collection. This has netted the team $15m despite NFT Worlds land trading 94% down from all-time highs. The platform is also home to a paltry 235 daily active users. Given the poor performance of the collection and weak user growth, some community members have become upset with the project’s founders continuing to receive royalties.
Supporters of royalties on digital collectibles and marketplaces argue that it could be an avenue for creators to earn additional income as their work becomes more popular, aside from the relatively small amounts made on primary sales. For instance, while the digital collectible collection of the bored ape yacht club (BAYC) only generated $2.2m in primary sales when it launched in May 2021, the collection has since earned Yuga Labs $54m in secondary sales revenue by way of BAYC’s 2.5% royalty on every transaction.
The example of Van Gough buttresses their point. Though revered as one of the most excellent artists in death, Van Gough was poor while alive and only sold The Red Vineyard for 400 francs in Belgium several months before his death. Imagine a world where Van Gough had been able to collect royalties on his works while alive. He’d have been filthy rich.
Open Sea, the biggest NFT marketplace, sides with this ideology. Their royalty distribution is the most common framework implemented by marketplaces today. In this framework, creator royalties are defined at the collection level and must be set up within OpenSea’s collection-level settings by the collection owner. During this process, the creator will also associate a wallet address with the collection, designated to receive accrued royalties from OpenSea at regular intervals (usually every couple of weeks). Royalties generally range from 2.5% up to a limit of 10% of the final sale price. The seller always pays both the royalties and the trading fee collected by OpenSea on each trade. These fees are typically extrapolated away, with buyers simply paying the amount quoted by OpenSea as the NFT’s price (or the winning auction bid) plus gas fees.
Although Open Sea has lost some market share owing to the platforms that have removed royalties, they have not been as affected as the Solana NFT ecosystem.
A possible explanation is that those on the open sea marketplace are far higher USD value collections, like Fidenzas and Punks. These ones attract a class of buyers that are perhaps more interested in signalling status and storing value in these rare collectibles than flipping them for a quick profit. This contrasts those on Solana, who tend to be flippers cognizant of their margins rather than longer-term holders and retail users.
Whatever part of the argument one decides to tilt towards, it will surely impact museums and art galleries that have digital collections in the future.
The Impact on Museums and Art Galleries
If we were to side with those who believe royalties are unnecessary and exploitative, this would mean that museums and art galleries with digital collections would only be able to make money from the primary sales of these collections.
They’ll still be able to cover a wider audience. But their revenues are sure to be impacted. For creators who also seek to sell their collections through digital exhibitions done by these museums and galleries, their additional source of income would also be affected.
But it can be argued that the move to remove royalties totally or make them optional would make museums and art galleries put valuable collections on display that could command a higher primary price. This could curb the rancor that happened with the Goblintown collection, which netted more than $7m from a mere meme.
On the flip side, should royalties on digital collectibles remain, museums and art galleries will likely experience a revenue boom. Apart from the revenue obtained from primary sales, they will get more revenue as the collections sold become more popular. This would benefit museums a lot.
Conclusion and Possible Solutions
The arguments for and against collecting royalties on digital collectibles have their merits. But tilting towards either side is clear to have its resultant effect on museums and art galleries.
Some possible solutions to these contentions would be to make the buyer pay the royalties. Since they’re seeking to enter an NFT ecosystem, buyers are likely to pay royalties since they are also likely to leverage some utility associated with the digital collections.
Other possible solutions could be vertical integration of the marketplace where museums or art galleries build their marketplace. This is similar to the Amazon ecommerce model, where distribution is maximized, and profit is minimized. With this, museums and art galleries could keep more profit margins on digital collectibles.
Other likely solutions could also be higher mint prices and alternate revenue streams where subscription-based models are introduced to maintain the repeatable income of the digital collectibles, among others.
But the truth remains that whichever side one tilts towards or whatever solution is offered, it would be interesting to know how stakeholders react and try to find a sustainable long-term solution to the contentions about royalties on digital collectibles.