The Battle for Royalties: Blur vs. OpenSea
There's a storm brewing in NFT land - is it just about royalties, or is there more to it?
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Back in June, I wrote an article on Sudoswap, and their controversial move to cut out royalties from NFT sales. Since then, we’ve seen a tricky battle between marketplaces, creators and traders filled with philosophical arguments, sneaky corporate strategy and profit maximisation, all in one of the most destructive bear markets in crypto history.
In this article, we’ll dive deep into the push towards enforcing royalties on-chain, the ensuing battle between OpenSea and its competitors and some classic web2 anti-competitive behaviour. Let’s get started!
OpenSea’s Battle To Stay Relevant
Since 2018, OpenSea has used an open-source protocol called Wyvern to handle order matching on their marketplace. Wyvern allows the trading of any kind of nonfungible asset across any EVM-based chain.
Whilst there are some technicalities around why OpenSea had to use the Wyvern protocol to build out their marketplace, they recently migrated across to their own protocol called Seaport. With Seaport, users were expected to save roughly 35% on gas fees with each transaction and were no longer required to pay a one-off fee to initiate their account before making their first trade using OpenSea.
More importantly, however, Seaport was created to be an open-source protocol, allowing other NFT marketplaces to adopt the protocol if they wish. In one of my previous articles on NFTs and OpenSea, I noted that beyond having first mover advantage, OpenSea’s product was quite poor, and largely didn’t have a lot of embedded defensibility.
Since then, the implementation of Seaport has given them a certain level of control over their own platform, which has resulted in better UX for their users, through different ways of bidding, trade types and generally cheaper costs to trade. However, this meant that Opensea could push its own ideals on users of the protocol (keep this in mind for later). So far, over 20 teams have used Seaport to build their own custom marketplaces including Yuga Labs’ Apecoin marketplace.
See, whilst all this was happening, in the background, two fundamental shifts were occurring in the NFT market.
Crypto was burning. From June to November 2022, NFT trading volumes fell off a cliff and didn’t bounce back. ETH and other altcoins also fell off a cliff and there are serious concerns about the viability of the crypto market in general.
A wave of new competitors such as Sudoswap and Blur emerged, as well as custom NFT marketplace solutions popping up every now and then. These marketplaces didn’t respect royalty fees and given the bear market, NFT traders opted to use these platforms to cut their own cost basis.
As a result, OpenSea’s cut of the NFT market severely tanked and for the first time since the Looksrare vampire attack, OpenSea was seriously under pressure to fight back in some way. So much so that for some weeks at the back end of 2022, OpenSea was second in NFT trading volume to Blur (including and excluding any wash trading).
And so OpenSea took some steep measures to defend its market share in November. This largely involved taking a stance on enforcing creator royalties on-chain.
The Creator Ownership Research Institute
Before we start, the first thing to make clear is that creator royalties were previously not stipulated within a smart contract, but rather enforced by marketplaces.
During a bull market, no one blinked an eye at this, as the profit gained from trading an NFT was so much greater than a measly 5-10% royalty.
But when the bear market hit, traders scrounged around for extra profits or tried to minimise their losses by shifting their volume onto marketplaces that conveniently disregarded the creator royalty.
In direct response to this, and as a way to prevent multi-tenanting on different NFT exchanges, OpenSea instituted a new policy in favour of only allowing new collections that have an on-chain royalty enforcement list on the platform.
This was quickly met with a ton of positive and negative feedback. Positively, artists were happy to see that OpenSea was taking a stance on this matter. However, negatively, it invoked worries of further centralisation in the space that could be used maliciously, and moreover, existing collections were not even mentioned in the new policy.
Whilst the second negative was rectified within a few days, the matter around addressing centralisation is definitely one that requires thinking and careful structuring. The first step in this journey is through a collective initiative called the Creator Ownership Research Institute (CORI) which is led by ZORA, OpenSea, Manifold, Foundation, SuperRare, and Nifty Gateway.
As per the CORI website, its stated long-term goal “is to create & govern sustainable tools and standards for protecting creator royalties in the NFT ecosystem.” Pretty broad and seemingly harmless. But what is the path to getting there?
The institute has so far implemented what they call an ‘Operator Filter’. This filter allows collections to prevent the transfer of NFTs on marketplaces that do not honour royalties, thereby providing one method of enforcing royalty payments on-chain.
Whilst seemingly innocent and positioned as a net positive for the ecosystem, behind this initiative, it’s quite clear that this is in some way a form of regulatory capture. In the physical world, regulatory capture occurs when a government body or regulator is charged with acting in the public’s interest, and instead ends up implementing policies that benefit the incumbent firms in that industry.
In the same way, by implementing the operator filter, OpenSea & co. quite clearly acted to the benefit of the ecosystem, but most importantly to the benefit of themselves by luring liquidity back onto their marketplaces, or at the very least, by forcing other marketplaces to give up part of their value proposition.
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For those who aren’t aware, Blur is the latest competitor to OpenSea and has a real chance of dethroning the king. Blur is an NFT marketplace aimed at high-volume NFT traders, and provides them with a customisable UX and additional trading features in addition to flexible royalties and 0% trading fees on the platform.
Soft launching in July 2022, Blur really took off in October 2022 through an extensive airdrop program that attracted 1000s of traders across from OpenSea. So much so that it accounted for the highest volume (in ETH) across all major NFT marketplaces and aggregators in December 2022 and January 2023.
Obviously, OpenSea felt this hit their bottom line and blocked Blur through their operator filter. In response to this, Blur did comply and added royalties to new collections, however, this was not sufficient for OpenSea to remove the block.
So what did Blur do?
Well, quite simply, they built a second trading system to sit alongside their own proprietary exchange. This trading system complied fully with OpenSea’s stipulations and allowed both new and old collections to enforce royalties on every trade. But, surely this took months of development, and custom work, right?
Blur simply took Seaport, OpenSea’s open-source protocol, implemented that alongside their own trading system and then routed trades depending on which collection is being traded. This allows them to completely bypass any restriction OpenSea places on them, whilst also paying out royalties to collections that are enforcing them.
And so, whilst Blur using Seaport is a good thing for OpenSea, it also means that OpenSea’s anti-competitive measures probably didn’t work as intended.
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Balancing Decentralization and Commercial Competition
So there are two interesting things happening here and both are somewhat intertwined
The tension between maintaining an open and friendly ecosystem, versus the competitive pressures of running a profitable business
Continuing along with the theme of centralisation bringing upon the downfall of crypto, it’s fascinating to see that OpenSea and others defaulted towards the centralised policy as a means for dealing with competitive forces. In the bull market, everyone touted decentralisation as the next paradigm, but as decentralisation becomes a hindrance to the core business, that mantra falls by the wayside.
Indeed, most people would jump to the fact that OpenSea could’ve launched a token of some sort to incentivise people to keep trading on their platform and to comply with royalties, as we know from recent past experiences, tokens are not the answer to everything.
Instead, it would’ve been nice to see EIP-2981, an NFT royalty standard is adopted through this push. A large part of the reason why royalty-free trades became the norm was that royalties need to be stipulated in each marketplace. They are not coded into the contract from day 0. With EIP-2981, royalty information would be attached to the token itself, thereby making use of a common data store and computation layer that all participants can access - meaning no excuses for bypassing a royalty payment.
Encouraging or creating incentives for NFT collections to implement EIP-2981 or another EIP, would’ve allowed for further collaboration, without invoking fears of centralisation or anti-competitive behaviour. This latest skirmish really puts the decentralisation movement behind. We still have a long way to go in terms of finding the right balance between competitive markets and decentralisation.
The reversion of a healthy creator-focused NFT ecosystem towards one that mimics traditional negative behaviour
Through the bull run, people touted the benefits of NFTs for traditional artists and musicians, especially through the form of royalties. And as soon as it became unprofitable to uphold royalties, they were dropped and forgotten about.
Personally, I’m a huge fan of royalties. There is not too much incentive for artists to keep pumping out work at a high level without ongoing payments, especially if they are underrated early in their careers.
But for this to really work, it needs to be enforced in the contract. It shouldn’t be seen as some form of charity, but rather as a payment for a good that has been created by someone. People need to be paying royalties, regardless of the state of the market.
Overall, this mini battle showcases the nuance of web3 and the decentralised world that we may be headed towards. I am not a pure decentralisation maxi, but in some instances, it does make sense and it does result in better products for the end consumer. However, in saying that, teams and strategists need to unlearn their old web2 tendencies and embrace the unknown.
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