Unchained - The Chopping Block: Two on Two Debate: NFT Royalty Throwdown! - Ep. 409

Episode Date: October 19, 2022

Welcome to The Chopping Block! Host Haseeb Qureshi partnered with Zhuoxun Yin, cofounder of Magic Eden, to debate Unchained host Laura Shin and Li Jin, cofounder at Variant Fund, on the topic of NFT Royalties.  Show highlights: What NFT royalties are Why Laura believes zero NFT royalties is a bad business decision prioritizing short-term needs over long-term ones and that it will turn creators off from the industry How charging royalties is not sustainable, according to Haseeb Why royalties are the best mechanism to align incentives between creators and holders, according to Li The technical limitations of NFT royalties on a general-purpose blockchain like Ethereum or Solana How to align incentives between NFT creators and holders Why the prices of NFTs would go up if royalties are not enforced Whether the NFT market will change in the future Whether it is possible to create a standard that enforces royalties in a smart contract The creators’ reaction to Magic Eden moving to optional royalties The possibility of a bifurcation of the NFT market Hosts Haseeb Qureshi, managing partner at Dragonfly  Guests Laura Shin, author, and host of Unchained Zhuoxun Yin, cofounder of Magic Eden Li Jin, cofounder of Variant Episode Links Magic Eden Optional Royalties - Unchained Coverage  Post-debate poll Tool Metashield  The standards innovation paradox by Li Jin X2y2 flexible royalties Previous episodes of The Chopping Block debating NFT Royalties The Chopping Block - Ep. 405 The Chopping Block - Ep. 386 Article: Why NFT Creators and Collectors Can’t Stop Talking About Artist Royalties Article: NFT Royalties: Why artists love them, and traders don’t Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5 protocols are the antidote to this problem. Hello, everybody. Welcome to a special episode of the chopping block.

So normally, this happens every couple weeks with different cast of characters. But today, we had a very special episode for you because there's been a lot of drama lately in the NFT world that we thought, It'd be great to bring some people together and do a live debate about the pros and cons of the situation. So first, let me introduce the characters. Then I'm going to tell you the backdrop of what it is that we're debating about today. So first, you have me. I'm Haseeb. I'm a managing partner at Dragonfly Capital, which is an investment firm.

Actually, have Laura, who is the CEO of the show of Unchained Podcast, well-known journalist and podcaster. Then we have Joshun. He is one of the co-founders of Magic Eden, which is the top NFT marketplace on Solana. And then we also have Lee Jin. Lee is one of the co-founders, or the general partners at Variant, and was previously one of the popularizers of the term creator economy at Anderson Horowitz.

And so it's very central to the question of how creators are viewing the world of NFTs. So the topic for the day is around NFT royalties. So last time, Laura and I got into it about the pros and cons of NFT royalties and whether NFT royalties were going to be long for this world. And the world was wrong. rocked a few days ago when Joe Shun, among his team at Magic Aden, announced that they were

for the first time no longer going to be enforcing NFT royalties. And this kind of rocked the NFT world. So first let me explain very briefly what NFT royalties are, and then we're going to get into the meat of it. So NFT royalties, let's say before going back, you know, a few months ago back when NFT royalties were still the norm, if you trade an NFT on OpenC, every NFT collection can specify its royalty, meaning that any time that a trade takes place on the platform, like on OpenC. Let's say 5% is the number that the creator specifies. 5% of the sale price goes back to the creator.

And this is a concept that's been very popularized by many people, let's say, as one of the key selling points of NFTs. But we've seen the increasing rise of new marketplaces that do not respect the concept of royalties, or do not enforce, I should say, the concept of royalties. So Magic Eden, to be clear, announced that they were no longer enforcing royalties, meaning that users could opt in whether or not they wanted to pay the royalty. But we also have new platforms like pseudoswap and these automated market makers that do not directly enforce royalties. And we've seen more and more digression from the norm, that more and more people are finding different ways to approach the question of royalties.

So the debate is really how do we feel about the rise or the decline of royalties? And do we believe that this is the way the world is going? And do we believe that this is good or bad for the world and for, for, for, for, NFTs and for creators. So on the pro-side of pro-royalties is going to be Laura and Legion. And on the anti-side, or at least that the royalties are going to go away, are myself and Jo Shun from Magic Eden. So with that as backdrop, Laura, why don't you start with your opening statement about royalties? So my first thought upon hearing the news about Magic Eden and just in general, my thoughts around the 0% royalties or not enforcing royalties is that

this is really short-term thinking by the platforms. And I think most crypto people would probably have heard this saying by Naval where he talks about how short-term thinking or prioritizing short-term things leads to bad outcomes. So for instance, like choosing to eat whatever you want versus like following a healthy diet or like choosing to not exercise versus exercising or, you know, whatever, spending, you know, like crazy versus like spending within your budget. And so I think essentially what's happening here is that the platforms are deciding to prioritize one half of their constituents, which is the purchasers of the NFTs, whereas the creators are the ones who are actually more valuable and they're not realizing that.

And the reason for this is that the people that are purchasing the NFTs, okay, they're like, you know, giving income, right? But their like income, like money is fungible as we, you know, very well know in the crypto world. And the creators, as we all know, are offering something non-fundable, very unique, where each individual person only has that, you know, that they're offering something that like no one else on the planet can offer. It's really like a very valuable thing in that regard because it's like, you know, you can't find someone else who's just going to like offer that same thing, that creator, you know, has to give to the world. So, you know, when I think about like how they're prioritizing that, essentially the creators are going to leave. They're going to be like, okay, we're not interested in working with these people who are kind of screwing us over. And not only that, but it's like a weird prioritization thing where it's like, you know, you can get money from a lot of different places. There's a lot of different, you know, participants in the market, you cannot get, like, you know, certain valuable NFTs. They're just, unless that

creator works with you. So, like, to my mind, it's just like, it doesn't make sense from a business perspective. And then the other thing I would say is, like, we're still early in the NFT space that I feel that this is going to reverberate out into the mainstream world. And it's going to turn people off of the crypto world is going to turn creators off of trying to get involved into NFTs and Web 3 because, you know, that was a big selling point around NFTs, which has Cabe you and I talked about before. Apparently not you, not all VCs, but this was something that was sort of promised to creators. And now, now you all are pulling back and like prioritizing what the speculators make off of this. So in that regard, I feel like

that's just going to kind of delay the progress of the NFT space and the growth of it because all these newcomers that might have been interested in coming. And they're going to be like, oh, forget it. It's the same as Web 2. There's nothing different. It was just all, you know, like smoke and mirrors. And they're just going to be like, okay, we're not going to do this. It doesn't make sense for us. So in that regard, that's another reason why I feel like, again, this is a bad business decision. Like it literally, to my mind, just doesn't make any sense. And I guess the last thing I would say about this is that. So I see from your last, from our last discussion, I totally take your point that

it's sort of this race to the bottom. And, you know, you can't enforce it. it on chain or whatever. And so people are, they're just not going to do it. But like, I mean, you're a VC. You work with entrepreneurs. And the problem that creators have and, you know, I've been in the working world for 25 years. I'm heading to my 25th college reunion very soon. I've been a creator this whole time. And I have seen like how the internet has rocked my industry. And I have seen that this is like a really longstanding problem. And I have a lot of friends who are not writers like me, but they're musicians. or their artists or, you know, I've seen this problem across all different types of creative

endeavors. And I feel like it's such a huge problem that if an entrepreneur could solve it, I mean, it would be like a big pay date for them. And so, you know, your arguments last time I was a little bit like, oh, it's this like defeatist attitude of like, oh, we can't do anything about it, therefore we won't. Whereas I would challenge you to say, hey, what could we do to solve this like really, you know, big problem that a lot of people suffer from? So those are kind of like, I, I I have more points, but those are my top line points and, like, probably my main arguments. Actually, last thing I want to say just about my personal experience with this is that, like, you know, my first job in journalism was at Newsweek.

And I kind of joined it a hot time because Newsweek had broken all this news about like Monica Lewinsky and blah, blah, blah. And so it was like, you know, like a cool thing. And when I joined there, you know, the top editors, they like took cars, they had nice lunches. And you know, they're probably very well paid. like roughly maybe 10 years later, newsweek got sold for $1. You know, like things like Craigslist took, you know, classified advertising way from newspapers, this whole idea that they were just going to give Contowate for free.

Like, I don't know what they were thinking. They were idiots. But anyway, all these things kind of decimated revenues for media. When I talk about like my experience with this, like I just have seen so much upheaval and so much suffering and like so many people who had to leave journalism and do other things. So that's, again, like why I think. We shouldn't just roll over and be like, okay, there's nothing to do. Forget it. I think this is such a big problem and that if we were to solve it, it would unlock so much creativity and like lead so many people

who actually want to do creative work for a living. It would enable them to do it. And I think that would be like huge, huge, because think about this, all the most popular things in our society, they are cultural things. You know, like look at all the most popular like actors and actresses, you know, whatever, just celebs. They're all like kind of cultural people. Like maybe athletes is you know, another one. But like, by and large, you know, it's not like, you know, unfortunately, sorry, VCs or, you know what I mean. It's like, it's not money people. I'm just saying, like, people really do value culture. So it doesn't make any sense that we would say, oh, you know what, it's too hard to do this. We're not, we're just going to forget it and like

not, not reward the creators. Okay. Laura, so you made, I made a lot of points. Some of them which were directed straight at me. Well, because we're in a way of more history. It's true. It's true. It's true. There's a continuation of a earlier conversation. So let me start by kind of the high level, my high level view, because I think a lot of people on Twitter kind of took something that I wasn't intending to say as what I was saying. So there's an old saying, show me the incentive and I'll show you the outcome. To me, this characterizes exactly what I'm saying about NFT royalties is that there's such a massive

chasm of difference between something that is enforced by code and something that is enforced by norms. And NFT royalties have been up until now enforced by norms. Like literally the way that you encode a royalty. I don't know if anybody knows this, but I just want to explain. The way that you tell NFT marketplaces what your royalty is, is that so you can think of like a, you can think of an NFT collection as like a big bundle of data. And some of that data is like here's where the images. Here's some metadata. Here's the name of the thing. And it's all this big bundle of data, like a big zip file. Okay. In that giant zip file, there's a little piece of text that says, I want the royalty to be two and a half percent.

That's it. There's no enforcement mechanism. There's never been an enforcement mechanism. The whole idea is that this is like, imagine that I was selling a book and I put my book in a bookstores. Okay. And my book says, on the back cover, it says, if you sell this book at a store, please, you know, Venmo me five bucks every time that you sell this book, right? Like, okay, that doesn't work. Like, it might work for a while. Maybe some bookstores will be like, you know what? I love Haseeb so much. He's such a great writer. I want to make sure it's sustainable for him. I'm going to enforce you to venmo him five bucks every time you buy this book. But in reality, that is not a mechanism. That is not enforceable. Right. So to me,

saying that, isn't it so much better in a world where NFT royalties are enforced on chain? Yes, I agree with that. That would be a better world. That is not the world that we live in. The world that we live in is one such that NFT royalties are kind of like, I sort of analogize them to MEV, with minor attractable value, which is that, you know, for a long time, nobody extracted MEV. It was a norm. Basically, you know, back in 2017, That was the first time that we saw, like, big mining pools, start to play around with the men pool and mess around with stuff and frontrun people. And people freaked out.

They were like, oh, my God, I can't believe that a mining pool would mess with the transactions in a block. And miners learn, okay, never do that again. That's totally not okay. And this norm just got enforced for a while, for a while. And the thing about anything that is enforced with norms is that eventually somebody is going to stop enforcing the norm. And when that somebody stops enforcing the norm, when people start front running, when people start extracting MEP, then all of a sudden, you can, can either say, look, guys, please, please, please follow the norm and just yell until you're

blue in the face, or you can say, this is where the competitive dynamics are going to take us. Blockchains are built on the ideas of incentives, on the ideas of code enforcing rules rather than humans enforcing rules. And if you don't have that, then you need to come up with something else. You need to innovate, right? So to me, the idea that we're going to stick to royalties because we had this, you know, people were doing this, everything was kumbaya, open sea had a monopoly, and so nobody ever had to complain about, you know, something that OpenC still enforces royalties, right? But in many ways, they're the biggest one left.

X2Y2 has moved from non-enforcing royalties to then letting the holders decide whether royalties are enforced. Suda swap is not enforcing royalties. Now Magic Eden is not enforcing royalties. We know where this is going. We've seen this game play out a thousand times. So making a moralistic argument is not going to get you there. You need to innovate.

That's always the answer. When the market structure doesn't go your way, you need to innovate, not, you know, yell at the status quo. Wait, so we agree then. On what? On the need to innovate. I mean, I agree on the need to innovate, but I don't think, look, I don't think the answer is going to be that creators are going to find a way to get back the royalties. Right now, I was pulling some data on how much different collections are getting from royalties compared to how much they're getting in primary, right? And for a lot of the biggest collections, it depends on when they launched. If they launched later, they have less from royalties. They launched earlier. They have more from royalties because it kind of

depends mostly on where you were during the NFT crazy bull market. If your, if your, if your collection was around for a lot of the NFT bull market, there was so much velocity to these things that you made a bunch from royalties. If you launch relatively late, then a very small percentage of your revenue came from royalties. And it's, it's trending down as NFT volumes are trended down. So it ranges from like 20% to, you know, for, for, for Bordea Bia Club, it's like 80% of their revenue came from. But, you know, when they minted, they were tiny. So obviously primary was so long ago and so much secondary transaction volume has happened since then. But for most of these things, it's a significant portion that they're getting from royalties.

But the amount that they're paying to marketplaces, like how much revenue, how much fee revenue are they paying to marketplaces versus the royalties? For a lot of these, it's like three to one. They're making way more royalties than the marketplace they're making in fees, which means that right now you have a situation where what you're talking about is bargaining power. How much bargaining power do the creators have versus the marketplaces? This is not a moral question. This is an economic question. I don't know the answer to it, but I'd be very surprised if the answer is it's exactly what it was six months ago. Let me jump in and pile in.

Yeah, we need to finish our opening statements. So, Haseeb, do you feel you're done with your opening? I'll stop there. I'll stop there. I have more to say, believe me, but I'll stop there. Yeah, we all do. At the risk of going hard at Lee, one of our investors, at Magic Eden, let me preface that, make this a friendly conversation. But I think there's a few things that I think are just important to reframe kind of up front, right?

I think that number one, this is by no means the end state. And that's a view that Magic Eden has. Of course, it is a decision that is happening today, but this will not be the end state. And I think generally maybe we all align on that because, like, there is some innovation that has to happen. I think statement number two is that Magic Eden is not anti-royalties. And I think that the debate on crypto-tutura in general is very, very typically two ends of the spectrum, and obviously the most extreme ends of the spectrum. And the reality is often somewhere in between. Point number three, which is kind of being a little bit related to this, is that being optional royalty and being procreator, those two concepts can coexist.

And that is our view at Magic Eden as well, which is why I think we can get into the details of some of the things that we announced on Friday. I really, really do want to massive plus one to Haseep's point earlier, that it's all about like kind of a market structure incentives question at the end of the day in that long term, long term, we were always going to have this conversation, whether that's on Friday when Magic Eden dropped all this news, whether it's next week, whether it's two months from now, whether it's a year from now. This conversation would have had to have happened. And then long term, there has to be a balance in an equilibrium, right? I actually think the bull market basically distorted everything, it distorted the fact that it's okay to pay a 12, 13% spread

on something. Because it didn't really matter, right? It didn't really matter at all. Over the last sort of nine months or so, and magicine, to be fair, has only been around for 12 months, right? We saw a very, very gradual trend towards, you know, to Haseeb's analogy, like people starting to extract, not it's not MV, but in this case, starting to extract value through not paying royalties in some way. And to be fair, you could do this in many ways before Magic Eden decided to get optional royalties, right? There was OTC, and OTC volume was picking up.

And then maybe three or four months ago, there was actually three or four marketplaces on Solana that did go zero royalties. So this has been a trend that's been happening for some time. But it's a kind of classic market incentives question, in our opinion. And the statements of being optional royalty and being procreater can coexist. And that's why I think we made two kind of really big things happen on Friday.

One is obviously that we went optional royalties. But the key thing that I want to point out there is that we did it on the buy side. So royalties are being paid on the buyer's side. And why is that distinction important? It's because there's no incentive for a seller to pay the royalty because they're exiting the community or they're exiting the project. On the by side, the person wants to get into this community. or wants to play this game or wants to enter this project. So there is more of an incentive for them to actually do that

and a perfect opportunity for the creator to say, if you do not honor this royalty, these are the things you're going to miss out on, right? Whether it's access to the game or something else or access to this discord community or access to seeking rewards, whatever it is. That's like important point number one. Important point number two is that Magic Eden

is also putting our money where our mouth is, in that we think that innovation is going to solve this, whether it's some on-chain stuff like harbidja taxes, whether it's off-chain stuff like surfacing data, information about NFT holders and the actual NFTs themselves to let creators, you know, create sticks and carrots to incentivize and disincentivized behavior. So we're putting up a million dollar fund and hackathon

to incentivize projects, whether it's NFT creators or just developers in general, to work with us to basically come up with a bunch of different ideas, right, which we will then happily implement to help creators protect and enforce royalties if that's the business model they want to go. But yeah, there's a lot of nuance. I won't take up too much air time for this opening statement. There's like a lot of nuance here. And I think the framing of like pro-ante is like generally a pretty unhelpful one. There's many, many layers of, you know, types of entities, types of creators, types of business models that I think is actually at the heart of this question, right? It's not whether it's pro-ante-royalty,

It's like, what is the sustainable business model that works in a market equilibrium structure? Okay, Lee, bring it home for the pro side. Sure. So I have two main thoughts. One is the creator-centric argument that is pro-royalty, and then the other argument that I have is the collector-centric argument that should be in favor of royalties. So I'll start with the creator-centric version. I think the raison d'etre of NFTs, general is to support the creator economy. NFTs were very much envisioned as this new monetization method for the creator economy that allowed creators to tap into digital scarcity for the first time ever and to be able to monetize based off of something that could actually be scarce. And so it's

like the entire market's appeal has been to creators, to independent creators, because of this. And I think undermining creator royalties is kind of like biting the hand that feeds you. It's undermining the reason why people are there in the first place. And over the last few years, a lot of Web2 platforms have realized that they need to be more creator-friendly because they realize that the entire value chain of their social networks, of their content platforms, start with creators. If you don't make creators happy, if creators don't feel like they're being taken care of, then ultimately they turn. And that leads to the demand side, the user side, churning as well. And so I think the entire value equation here in the NFT world also starts with creators, obviously. And so we need to do everything in our

power to ensure that creators feel like they're playing a fair game, that they're being taken care of, that the marketplace isn't just skewed towards the incentives of the buy side. So that's my first argument. And I recognize that a lot of listeners might think, okay, that's like kind of a moralistic argument. Yeah, it's great to support the greater economy. And yeah, we want to build a creator middle class. But like, how does that impact me and the fact that I'm spending money? And that's why my second argument is really around the collector argument for why they should also care about creator royalties. And so I actually want to echo what Hasib said about show me in the incentive and I'll show you the outcome. And I'll argue here that removing support for creator royalties is

actually a trade-off between short-term incentives and long-term incentives, where you're optimizing for what's short-term best for your own financial gain, but at the expense of your long-term holdings. And that's because I believe creator royalties are actually the best mechanism to align the incentives between the creators and their collectors. It allows collectors to benefit when creators works appreciate. It provides an incentive for creators to continue maintaining the health of their communities and the desirability of their collections, because they stand to benefit as the value of their works appreciate. In the absence of creator royalties, if you play out the incentives of what that entails,

ultimately my fear is that removing royalties means that creators are incentivized to just do as many primary mince as possible because it's a one-time transactional thing. And that ultimately leads to collectors seeing their holdings being devalued or are diluted because there's just so many works out there. And so ultimately, I actually think paying out creator royalties is the best thing for collectors because it helps to maintain the scarcity of the creator's work. A comp here might be thinking about like a company's equity. So the way in which founders are aligned with their investors is by, you know, having exposure to the same thing, which is the value of their company through the equity. And as the equity appreciates,

investors are happy, the holders are happy, and the founders stand to benefit as well. Another comp might be SaaS revenue enterprise businesses that are selling software as a service, which has become the most prevalent model for selling software versus one-time transactional software sales, which used to be the norm. And SaaS is a better business model for selling software, for selling services, because it aligns the incentives of the company that's offering that software with the incentives of the customer. The company that's offering the software has an incentive to continue maintaining it, upgrading it, making sure it's as best as possible so that people will continue paying. And similarly, in the NFT space, I think creator royalties

aligns the incentives such that creators want to make their collection as desirable as possible. They have an incentive to add additional utility to make sure that there's always that purchasing desire on the part of the demand side of the market. Nice job, Lee. That was great. I saw both of them nodding and agree. agreement with you. Oh, come on.

That was just being friendly while I was getting ready to make my points. So, okay, so two points I want to make. One in response to the points, both you and, both Lee and Laura, you both made about, you know, needing to value creators. But the second point I want to make, actually, I'll make the second point first. You know, Joshun struck a very diplomatic tone. I'm going to be less diplomatic than him. I know.

I was like, he's like the peacemaker in the group. He is, he is. He's a little too generous. But I'm going to take a firm a stand. is that I think royalties are absolutely doomed. Part of the reason is that I think royalties strikes something that's really at the heart of blockchains and how they work, right?

Which is that you cannot have a system that is open, permissionless, and that allows anyone to do anything and also enforce this idea that if you sell this thing, then I get a cut. Now, why are those two things incompatible? So when I was posting about this, a lot of people were responding to me in DMs

telling me like, oh, you should just list them on a mutable. Okay? And I was looking into mutable. I said, wait, why is immutable special? So immutable, if you use the immutable blockchain, the immutable blockchain is not touring complete, meaning you cannot write general smart contracts on immutable. Immutable only lets you have an NFT,

transfer an NFT, sell an NFT. That's it. There's only a few things that you can do on immutable. Now, if you create a marketplace or create a blockchain, but the only things you can do are those things, you basically gate all the functions, even that is still not enough to enforce royalty. because as long as you can transfer an NFT to Jocin's point, you can always do an off,

sort of off market OTC sale, which is something that's been growing. Like I know a lot of NFT collectors. More and more, they are doing this. They're not going on OpenCe. They're not going on Magic Eden. They're going into their own communities and selling to each other because why are we paying this tax, right? Like if this is exactly what you should expect to happen, if companies are extracting too much

revenue, then customers will find other venues. Like, that's just how every single marketplace works. if the market is free. And crypto has always been about this idea that the markets are open and totally permissionless. Now, so on immutable, you can kind of force it if you push enough liquidity into the on chain order book or whatever. But on Ethereum, zero chance.

On Solana, zero chance. Because anybody can do anything. That's the whole concept. As long as that's true, it's kind of, you know, to me, the idea of enforcing royalties, it reminds me a lot of, you guys know, know, John Deere, the company that builds like tractors and, you know, a lot of farming. So there have been a lot of famous antitrust cases against John Deere because John Deere, what they do is they force your tractor to only be used by you, which kind of destroys the resale value of your tractor. So if you have a tractor, you want to sell to somebody, tough shit, like you have to do all the stuff. I believe this is how it works. There's all the stuff that John Deere forces you to do in order to actually resell the tractor, which makes the resale value of the tractor plummet, right? Because you just can't sell it as easily as you could if it was just an unbranded piece of hardware. this is the exact same thing that NFT royalties are.

NFT royalties are a way of saying, you cannot buy and sell this freely. If you do, I will extract a tax. Now, if you can enforce that, fair game. Okay, fine, you can enforce it. But if you can't enforce it, I know exactly where this is going every single time, which is that people will find a way to win out of this pressure that you're putting on them in the market. Right. But wait, Haseeb, I'm confused because earlier you said that you felt the solution was to innovate.

And I thought that you were in agreement with me. me that this was a problem that was worth solving and that entrepreneurs... I agree, but what's the problem? Yes, the question is what's the problem? To me, the problem is not that people aren't getting royalties anymore. That's not the problem. The problem is the core problem, which is how can you create alignment between creators and what they create after they sell it? That is the problem. The problem is not, okay, well, people don't have royalties anymore. How can we get royalties back in their hands? I think the concept of royalties is not going to survive. But I think the thing that royalties do is valuable, which is, you know, to Lee's point,

when you sell something, you should have an incentive to make that thing continue to be valuable. How can you do that? You know, on a previous show, we talked about a couple ways that I think, again, none of them are perfect, right? Like the idea of if you're doing a collection, you keep back 20% and you, you know, mint them over time or you invest them over time, such that you continue to get, you know, you can be able to sell your NFTs into the future over the next three, four years, kind of like you would with a company. And then you sell those over time as the value of the collection increases. Or alternatively, if you're selling a 101 NFT, you could tokenize the NFT, keep back 20% of the tokenized NFT, sell 80% of it. And now you have economic exposure to the part

of the NFT that you didn't sell. Now, are these perfect? No, of course. They're way far from perfect, right? But neither are royalties. Royalties don't get you there either. So I do think you have to be creative, but I don't think you're going to get back to the world where, okay, we just all go back to enforcing royalties the way that OpenC does? Yeah, I think one thing I'll be very explicit about is that the only ways to innovate at the enforcement level, if you truly want to technically enforce it, there are strong tradeoffs around centralization and permissionlessness. That's basic, that is just fact. You cannot have true enforcement without making that tradeoff. And I think at that point, it's like, how much of the

value prop, the end of NFTs, do we even, you know, really even value anymore, right, in the traditional sense. So I think from an innovation standpoint, it has to come from, yeah, I agree with, I see, number one, it has to be business models and monetization. Or number two is some off-chain kind of incentives, right, that the creator, you know, makes decisions on whether it's to allow or disallow some stuff. In terms of like true on-chain innovation here, there is a lot you could do. You could blacklist a bunch of stuff. You could restrict and use like freeze authorities. There's a bunch of different solutions around that front, but people have to understand that if you want to go down that path, it truly cuts at the core

of why we even have NFTs and why we even want to use NFTs as a interesting type of asset, right? On the on the business model side, I do think that I disagree with Lee on royalties being the absolute best way to align incentives. I think it's a decent way to align incentives. And I think it's a, people understand it, right? That's actually the reason that this thing took off because it's just easy to comprehend. I believe the true way to align incentives is the creator should just own some of their NFTs. That's the true way, in my opinion, over time, you know, basically that they're the same as their holders, right, which is exactly the same way that, like, that's a truer form of owning equity, so to speak, right, of how VCs and

companies align incentives. It's a truer sense of, you know, it's sort of similar to how projects and fungible tokens also align incentives, right? Like, projects who launch tokens also own part of the token supply, so on and so forth. So I think that is a more direct way of actually achieving that incentive. There are other ways, too. I think there was an article by a Fubar, a while back who talked about maybe anchoring on market cap, right, rather than true just like trade volume and, and royalties based off of that. But that's where the innovation, I think, needs to be focused around, less so around like on-chain enforcement, because that's generally not going to be possible. I agree that royalties aren't the only way to align incentives, but

I think we need to start with the psychology of a creator. So to Joshon's point around, you know, you could, this could lead to creators reserving more a higher percentage of their collection and just holding that as a way to gain exposure to appreciation. I think that's infeasible for a large majority of NFT creators out there because creators are people. They have economic needs. If we sort of rewind the tape back to like, why do they care about royalties and second. secondary revenue. It's because they have recurring economic needs and earning secondary revenue helps to be a source of ongoing revenue to them. It's kind of like how as a founder of a company, you're not only getting compensated in equity, you also have a salary that helps to pay your bills.

You need both things. You can't just have equity and no cash flow coming in to pay your expenses. And I think creators, I mean, yes, value capture is important and withholding a point. portion of their NFT collection helps to do that. But they also need some mechanism to generate cash flow on an ongoing basis. And royalties accomplish that in a really clean way. I want to push back on that because we've seen royalties, we've seen royalties plummet, right, just because of the fact that secondary trading is plummeting, right? So when velocity is super high, royalties look like this beautiful, magical way that creators get to get paid forever. Now we're seeing that primary is a lot bigger than royalties for most creators. And so before it looked

like it was like 50-50, half your revenue coming for royalties, half coming from primary, it seems like it's probably going to look more like 85, 15, something like that, that a very small portion of what you make is going to be in secondaries. Yes, I acknowledge that that is what is happening, but I think that is actually a very dystopian path for the NFT ecosystem. Basically, where that gets us to is a world in which creators are incentivized to constantly put out additional work, constantly be minting, make the initial mint price as high as possible, because who knows if they'll be able to, you know,

achieve a secondary sale or they have no incentive for there to be secondary transactions. So they're incentivized to have high mint prices and just put out as much work as possible. And so what does that look like for the NFT ecosystem? That looks like a world in which NFTs are only accessible by a small number of affluent individuals who probably get diluted down the line because the supply is just ever increasing. And so do we want that to be the future of NFTs Like personally, I think that's kind of like a dystopian future. That's where the lack of greater royalties gets us to.

Dystopian is a strong word. Like whether or not mint prices are low. I mean, you could just say like, okay, one-tenth of the mint is going to be a low price for like random punters. But yes, like, you know, right now most of these mints are basically lotteries. And if you're lucky enough to get in the lottery and you like win a bunch of money because you got into the mint, good for you. You were awake at that time. You were, you know, jamming the button on salons. or you took it down, maybe.

That doesn't seem to me like that's the primary thing about NFTs. You know, like that seems like an artifact of the way in which NFT hype played out in the cycle. But at the end of the day, like the reason why NFTs matter is not because of secondary transactions. It's not like these are all very minor parts of the NFT story. The main part of the NFT story is that it is a digitally native way to own stuff from people you care about. And the people you care about can sell those NFTs to people who care about owning that stuff, right?

none of that is impaired by saying that royalties are not enforceable on chain and that we have to find some other way to align incentives between creators and their fans. So like at the end of the day, the other thing, you know, you point out like, look, wouldn't it be terrible if the prices of NFTs go up?

It's like, well, yes, that will happen. Absolutely. Because the price of NFTs will go up because now you are not enforcing these secondary skimmings off the top on resales. When the resale value of something goes up, the primary value also goes up, right? because it's worth more because you can sell it for more.

And that selling chain extends all the way down. If the velocity of this thing is like 10 people are going to trade it by the end of the year, then that's like 5% 10 times that you're saving for the last purchaser who's willing to pay for it, which is the eventual holder. So all these people who are trading hands to get to the eventual holders, they're all willing to pay less along the chain until they find the eventual holder. If you just say no royalties, then the first person who buys is willing to pay more. So if you value creators, I don't know why you would say,

isn't it terrible that they have a high men price? Like that ruins the value of NFTs. I thought we just said that creators are valuable and that we should be willing to pay them what they're worth. Yeah, but Haseba, you don't know what it. Like, just every time you talk, your perspective is always from the side of the buyer. Like, you know, the way you framed it like,

oh, NFTs enable you to buy something from people you value. You know, you talked about it as a tax rather than, you know, income. Like, like just every single time, you're thinking about this, you always think about it from the side of the speculator or the buyers and never from the side of the creators. Okay, that's a great point. So you brought this up earlier. You said, I don't value, like basically our side, me, Josh, you know, we don't value creators.

And that if we really value creators. I don't think I said that at least not enough. Yeah, yeah. I wrote it down. I wrote it down. I said you're undervaluing the creators. If we're not creator friendly enough, then the creators are going to go elsewhere. Oh, oh, the short term.

Okay. Yeah. Being short term. Not value. Yeah. Right, right, right. So I, look, I understand your point, right? I do think creators are obviously super valuable.

NFTs were not built around creators. They were built around speculators. That's why all these people are here. They're all here because they want to make money. People don't come into NFTs for the love of the game. I mean, some people do, obviously. But most people who are here who are creating are here because they want to make money. But I don't think NFTs were created for speculators.

They were definitely billed as being something that could solve problems for creators. That was definitely the billing. It wasn't. I mean, the reason why so many. creators are here is because they know there's a lot of rich crypto people who are spending a lot of money on NFTs. And the idea of, you know, hey, we need to appease the creators because if we don't, they're going to go elsewhere. To me, I think it's very simple. If there are buyers, creators will come and sell to those buyers. Now, the market structure of that depends on, like,

the really specific details about how this thing is enforced, whether it's enforced, if they're going to be a small number of companies that can just, you know, do these handshakes and decide, you know, we're all going to enforce royalties and anyone who doesn't, we're going to freeze them out, right? There are ways to potentially enforce something that's not enforceable on chain. But at the end of the day, creators will come if there's a market for them to sell to. I don't think you should be thinking about this in terms of, you know, creators want this. And if we don't have this, they're going to go away. I would be very, very surprised.

And I'd be willing to make a bet on you, bet with you on this. Do you think that after royalties go away, that creators are going to go away as long as NFT prices continue to be around? Yes, I do. I do. because the lesson of social networks and social platforms over the last decade has been that the demand side, the audience side, the fan side follows the creators to wherever the creators decide to go. Like the entire content ecosystem is led by creators. Fans just go to wherever the creators are.

I don't think we've seen that in NFTs though. I think in NFTs what we see is that there's a small number of like, there's not a small number. There's a medium-sized number of NFT diehard, like, you know, very, very wealthy collectors who trade with each other a lot and signal with each other a lot on Twitter and on these different spaces. And they're the ones

buying most of the NFTs. There's a group of like 100,000 people and they're not being brought in by Snoop Dog. They're not being brought in by, you know, whatever random new person that comes in. They are the, they are like, when I talk to a lot of creators who are like, man, I should really get into NFTs because there's all these

crypto people who want to buy them. Not because my audience wants to come with me and start buying NFTs. Yeah. I don't know. Just, you know, what I would challenge you to do is I would challenge you to interview a lot of creators about their finances and about like how, you know, what their financial problems are and what their problems are like working with, you know, the different intermediaries that help

get their work out into the world, both in the traditional world and, you know, we could, you could ask them about NFTs too. but there's just like a lot of like sometimes when you talk I'm like wait like if you know kind of an actual person who does this stuff like this doesn't it just doesn't make sense for them like this thing about holding back some of the work to resell later especially for me when I was younger like a lot of creators when they're younger like you are literally like either going into debt which I did multiple times or you just you don't know how to pay your bills because like it takes you a long time to to produce one thing, and maybe you get like a couple hundred bucks from it. Like, you know,

it's not enough to like pay your bills. And like, you know, it's like that thing that Lee was saying about like just having kind of a revenue stream. Like when you're a creator, like you have to put in the time to like create the thing. And it takes a long time. And then whatever amount of money you get from it, which when you're young isn't going to be a lot. Like that is supposed to somehow pay off all your debt or whatever. Like it doesn't work. And so there's no, like they can't afford to hold back their work. And, you know, when I solicited arguments for this debate, somebody wrote me and said, oh, I'm a musician. And actually, sometimes I, you know, make a song. And I don't begin to see, like, real financial rewards from it for, until like seven years later. And, you know, so they'll,

like, put in all that time. And then, like, maybe they're lucky seven years down the line, it becomes valuable. So, like, just a lot of what you say, like, I just feel like it doesn't really work financially for them. I feel like if NFTs aren't offering this extra bonus that the Web2 platforms don't, then yeah, I don't see more of them coming here. It's just kind of like, why would they? And I don't think a lot of them are like, oh, I'm going to sell to rich crypto people. They don't think about that. They think I want to make my work and I want to get paid. They don't think I want to sell it to rich crypto people. I've never heard a creator say that. And Laura, I think the, so I'll share some data that we have that we crunched it on the magic eating side. The 50th percentile creator, so just the

average creator, makes 8% from royalties, 8%. Okay, but to a typical creator, 8% is really significant. That's like one-one's rent. Sure, but yeah, for sure, but to Hizib's point, it's 92, like a very, very large majority is coming from the primary anyway. So I think there's no deterrent, I believe that there isn't going to be that much of a long term. There may be a short term deterrent, right? Because I think generally, yeah, it takes time to adapt to different things that are happening from a market structure standpoint and a different way of thinking about monetization. That's going to take a long time anyway for the NFTs because we're still so early in a general sense. But there is still a large opportunity to come and monetize much more effectively through

a primary drop in NFTs than their next best, most viable alternative, right? That's still, that thing is still true. And then whether or not there's an extra 10% you can collect over royalties over the next 12 months, 24 months, however long that is, I do think that there's going to be way more ways to do that, not just through royalties. The second thing I'll just say on the royalty side is that they're not going away, right? Realties are not going away. it's just, it's optional, at least for us, optional on the buy side, which means that if there's

enough reason to do so, and if buyers feel compelled and creators feel like, hey, there is a bunch of really cool stuff that you get from being part of this community, then I do believe that people will pay that. And it just sort of feel, it felt very distorted over the last six months because over the bull market, royalties went to 10, 12, 15%. Whereas even for BAYC when they first got going, it was 2%, 2.5%. So there's a question of like, what is a level of royalty that is, you know, generally accepted, right? I actually do think that some minimum royalty, whether it's a few percent, it's probably fine. It's probably reasonable. I think most people would pay that, to be honest. But when you're talking a difference of 15 percent and 2 percent,

I think that that's really, really significant for the buyer. Yeah, I want to hone in on, I think, a sort of unspoken thing in this debate, which I think is that we are speaking about the NFT market today versus the NFT market in the future. So to Haseeb's point, I do acknowledge that I think a lot of the NFT market today is extremely financially driven. It's people flipping, selling for profit, treating it as a financial instrument, as a new asset class and just wanting to make money no matter how, no matter what the collection is. And in that context, I understand, understand the incentive on the buyer's side to want to strip out any part of the take rate as possible in order to maximize profits. My argument that is creator-centric and collector-centric,

I think, is necessary for NFTs to expand beyond that current market, which I believe is niche and going to remain small in the future. So for NFTs to become pervasive, for them to become a ecosystem that every creator in the world wants to participate in, I think there needs to be creator royalties because I think that is the most creator-friendly way that this technology has mass appeal to the greatest number of creators out there. If we just continue treating NFTs as a new financial market, a new thing to flip, I just don't think that that has mass appeal to consumers or creators and thus is going to limit the market potential of NFTs. So I want to get back to this point that Laura made of that, okay, well, if I'm sort of, that making an argument that's anti-royalty is basically saying that I don't care about the plight of creators.

I don't care about people who don't have enough money to make rent. Okay. Like, if somebody can't make their rent, my heart goes out to them. Like, that sucks. And I know what that's like. I've also been there. That being said, like, royalties are not the way in which you're going to figure out how to make rent. to Jocin's point,

royalties have become very small. They become a very small part of how people make money from NFTs. And if anything, they're trending smaller, right? Like, he's averaging out that data from the time that they've been in operation. We're now in a bare market,

royalties have gone down. And at the end of the day, the other thing, of course, as I was mentioning earlier, is that when royalties go down, primary is going to increase in value. And so there's a very good chance that that 8% gets made up

in the increased value you make through primary. Now, as a creator, if you can't hold back some of your collection and say, look, I can't, I just can't afford to hold something back and make a bet on myself because I just have to make rent. Like, that sucks. That's a terrible situation to be in. As a creator, you should basically have the right to be able to do that, right?

Imagine that we had your royalties and we could tokenize them. And we said, okay, now you have tokenized royalties, right? The royalty stream to you is actually in token form. Well, if you were a creator, you'd probably sell that too because you're like, shit, I need to make rent. And so you'd sell off the right to your royalties and you'd say, well, you know, Where am I now? Like, we haven't done that yet.

Nobody has tokenized their royalties. But if they did, I would guarantee you a lot of people who have very short-term needs would be selling off their royalties to another third party. In which case, you end up in the exact same place as you would with, like at the end of the day, somebody who has very low time preference who can't afford to make a bet on themselves is not going to make a bet on themselves. But I think in the long run, these things are not that different from each other. We had it today that basically people don't do this.

People don't tokenize their royalties. They try to tokenize other kinds of royalties, but they don't. not tokenize on chain royalties with enough time if royalties were enforced and they were enshrined eventually they would and you would see that happen to so you can't force somebody to take a bet on themselves if they don't want to whether or not whether it's with royalties or whether it's some other mechanism if they don't want to if they want to sell off their ownership in order to get paid today there's no market mechanism that can stop them and so the other the other side of this is that like oh sorry go ahead Laura I'm just laughing because again I feel like um it's this like oh well

too bad. We can't do anything about that attitude. Whereas I, like I said, I would want to see from you, like, oh, hey, I hear about this problem. Maybe I should try to look for an entrepreneur who could solve it. Like maybe there's a business here. That's what I'd rather. Maybe there is. And I think this is one thing, Kyle actually put out a good tweet storm earlier today about this. Yeah. Yeah. Let's talk about that. Yeah. So Kyle suggested that like, look, okay, let's say that the large platforms are moving away from enforcing royalties. Obviously, open C still is, but that's the last dominole, if all the large platforms move away from this,

then what's the new equilibrium? Well, his claim is that, well, you could have these verticalized platforms, which actually, I mean, Joshan knows this well, because that was kind of what Magic Eden was doing a lot in the early days, basically say that look,

what if Bordey Biac Club has their own marketplace and they compete? It's kind of like Shopify versus Amazon, right? Like you sort of have your own marketplace and you compete with the Amazon, everything store. You say, no, no, no, you should buy on my marketplace because it's branded, it's more community, you get perks, whatever.

But when you do it on my marketplace, you pay me royalties, right? And really, royalties are really just a platform fee if it's your own marketplace, right? It's not even a royalty anymore. It's just if you trade on my platform, I take the full fee instead of OpenC taking the fee. These things are isomorphic, right? It's not, we think about it as a royalty. It sounds like some special magical thing. It's just saying, I'm bundling this with the platform fee. And if you're running your own platform, then you get to have your own platform fee, right? You can take the fee instead of Magic Eden or instead of OpenCe taking the fee. And this seems like a good equilibrium. If you can convince people,

this is the best place to buy and sell my asset. You want to buy and sell it from me. And there's extra perks, there's extra upside, there's extra whatever. Or just it feels better to buy it from me rather than to buy it from this third-party marketplace. Then kudos to you. That's how the market works, is that people innovate. People have to be entrepreneurial if they want to capture more value. But if people, if Magic Eden or OpenC are doing a better job at captivating your community than you are, then maybe it is right that they should get the fee.

Yeah. I mean, I liked Kyle's tweet thread, which, by the way, I'll just. give some exposition for people, but essentially he was saying that, you know, the bigger some of these collections can get, the more that they can kind of control how they're sold and, like, really build the marketplace into the community. And actually, the way that I read it was that, you know, that could end up being the only marketplace where those NFTs are sold. There's probably not a way to enforce that. Yeah, that would then encourage on the kind of the whole centralization permission list thing that we were talking about before. Exactly. So you could

theoretically do that. Yeah. I think there really just needs to be innovation at the standards level to make it possible to enforce royalties as part of the contract itself. And I know that there's various Ethereum improvement proposals to do that. I think that is the viable path forward, not appealing to goodwill or this, you know, sort of moralistic argument to support creators, which I agree is insufficient. I think we need to appeal to just like code and standards, as well as the collector incentives. And then I think moving forward, looking into the future, tying back to something that I mentioned before,

which is like all of this has roots in what creators need, which is that they need recurring revenue. I think there can also be innovation in terms of new creator business models to make it possible for them to earn on a recurring basis, mapping to what their real world needs are, that extends beyond royalties as well. So perhaps there's areas where, we can innovate in terms of providing other types of products or services that they could sell

or new types of business models that do provide that recurring source of revenue. Can you talk more about the token standards? Because actually, I feel like, I feel like this came up when Haseep and I were talking last time where I said, why don't we create a new token standard that does enable this? And he made me feel like this was completely not possible. I made you feel like, hello. Yeah. But like now that I hear this, I'm like, oh, so it is possible to create a new. new like NFT token standard. I don't think it is possible.

There are two, there are two EIPs. One is 2891. The other is 4910 that both pertain to enforcing royalties as part of the smart contract. I don't know if there's much traction. I haven't looked into it super deeply. I do acknowledge that I think it is really difficult to innovate on standards once they have taken root and become really popular. This was the subject of a recent newsletter issue that I put out on my substack called the token innovation paradox about how tokens, not standards in general, technology standards in general, at first actually help to catalyze innovation because they give the ecosystem something to rally around, something to adhere to.

But ultimately, once they do gain adoption, it becomes really difficult to actually innovate on them because everyone now conforms to the existing standard and has, you know, you have to solve like a chicken and egg problem to get everyone to move to a new standard. But yeah, I mean, this is an active discussion that is definitely underway. I think there's a hard impossibility result here. Like I think if you want turning completeness, you want enforcement of royalties, and you want decentralization. So no like surveillance state, no like complicated apparatus that does market surveillance for every single trade and tries to figure out who is selling to whom and how did it work. If you want all three of those things, you're screwed. Like, at the end of the day, as long as you can do anything, as long as you have full

turning completeness, full programmability, right? There's no way to prove that a transfer is not a sale. There's no way to prove that. And then second is that even if the, the NFT token contract itself has some way of saying, this is the cell function or this is like the transfer function. And so if you do this, then you have to put in tokens on this side and you have to, you know, and then it transfers the ownership. You can always just, you can always just fake it.

You can always say, okay, well, I'm going to sell this for zero, but then actually there's a broader smart contract that sells it for a thousand and then I don't pay the tax. Or for a transfer, right, for a transfer, you don't even know if somebody else is getting paid on the other side of that transfer. So there's no way in principle. I mean, we saw this a long time ago with tokens. Long time ago people tried to do this with tokens, ERC20s, right, and say every time that you trade in ERC20, you pay a tax. Well, what happens when you transfer it from one wallet to your multi-sake? What happens when you transfer it from one address to your own address and you're just rebalancing as an exchange? Well, then you have to pay the tax.

And that just breaks everything. Like, it doesn't work. Unless you live in a world like Fortnite, where basically you know that it's one account, one person. And any time that you're sending from one person to another, you can basically track whether or not money moved. Unless you have that simple of a model of what people do and who they are, there's no way that you can enforce royalties in that way.

There's always a way around it. Josh, I don't know. You're closer to this than I am. I'm just like an armchair spectator. Like, honestly, we were thinking about doing this like a month ago. And we've been putting it off because we wanted to explore every possible technical option. And to his heaps point, that trilemma is a real thing. And that's why I think in the short term, the innovation that I expect to see is more around like creators employing.

And this could be in conjunction with marketplaces, like carrots and sticks, right? basically sticks to say you do not get the stuff if you don't pay the royalty and carrots to say like, hey, these are some incentives or reasons why or things that promote that behavior. Because anything at the, and there's already solutions on the Salana side that effectively allow like wrapping of tokens and freeze authorities. But that, again, it not only breaks the standards from like an adoption standpoint. So it kind of fragments the standard layer. but it also then introduces additional centralization. And to be fair, that may be something that some creators won.

And I think as a marketplace, we should also adopt those standards, right? And we can effectively have, you know, as a marketplace application at the app layer, we can talk to basically two different contracts and say, like, if you want the royalty respecting thing that's more centralized, sweet, we will honor that. if you want the normal one on like the current standard that is optional, that's fine too. I don't think we eventually want to be in the business of, you know, basically saying like, hey, creator, you have to go one way or another. But I do think that today it's very, very difficult to actually, it's not possible to enforce

everything on the current standard. You guys made that tool. I forget the name of it. That was like sort of the market surveillance thing. Yeah, yeah, I was just going to explain this. Like about a month ago when we were thinking about all the stuff, we actually created a tool for creators called Medershield. And we got, you know, 10 creators, some of the largest collections in Solana to get behind it. You know, we'd plan all the stuff in the background.

Basically, what the tool did was allowed creators to identify which NFTs and addresses were not respecting royalties on the, on the marketplaces that were optional royalty. And then it allowed them to basically update metadata on the NFT. Because on Solana, I don't know. know people generally know this, but the majority of NFTs on Solana are immutable. So you can change bits of the metadata. The creator can at any point in time, right? The creator can update metadata anytime. So did they degrade those NFTs?

Yeah, so basically this tool allowed people to blur, you know, the images, right, if they did not respect royalties. Oh, man. Yeah, we we- This is what happens, Laura. This is what happens. Yeah, so we built this with another marketplace, Quib who now we actually ended up they ended up joining our team just recently but we built this and put this out there and the general reaction was like oh my god NFT's

on Solana immutable that's crazy I can't believe that's a thing and then number two was how dare you know you magic Eden or you know the you know the creator tinker with you know my image that I own right so I think my learning from that was that the underlying foundational mechanic there around identifying which NFTs were royalty respecting and not respecting, that is solid. And I think I expect to see a lot more just little tools spring up that effectively repurposed that part of that product. But the additional step of the marketplace being involved in whether or not something is being changed or being blurred or whatever the outcome is, is not something that actually the marketplace, in my view,

should have a say on, right? That should be a creator decision on how they want to enforce that stick. But I do believe that today that is probably the easiest, most adoptable version of royalty protection that creators will have today. Yeah, I mean, we built that, put it out there, it's open source. If people want to use it, they should go and use it. I think we don't have a view on it, but I think it was probably too severe of a solution for a marketplace to introduce at the time. But just to give you guys a sense, we were thinking about this a long time ago, and we wanted to avoid the scenario of Magic Eden going to optional royalties. We really wanted to avoid it. We explored every possible technical, social contract, like any kind of path possible. But I just

ultimately feel like, to my earlier point, and to Haseeb's point, this is inevitable. And over time, we would either be having this chat today or we'd have it six months from now. It doesn't matter. It's going to happen. And we obviously considered the trade-offs and obviously knew this was going to be a ton of fud for us to take. But ultimately, the reason we did it was because... I would say it's criticism, not fud, but anyway. Sure. Yeah. Criticism for sure. I definitely, we definitely have a lot of criticism. But what is happening now is that at least everyone in the ecosystem is coming to the table to talk about what are the best ways to actually grow the entity ecosystem. And I think that's actually very, very important.

This was an elephant in the room otherwise. And wait, so what is the reaction from creators now that you've said this, announced this? Yeah, it's quite varied, which I think that's why the nuance of this chat is important here. Like for certain types of creators, they didn't really feel like anything really changed. So, for example, we serve a lot of games on Magic Eden, right? We've launched maybe 50, 60 gaming projects. And for the most part, a lot of them have different revenue streams. A lot of them are in the business of building a game, right?

Development-wise. And like, royalties were only basically a small part of what they would ultimately make money from. So this doesn't really change any of their romance. I think some of the larger PFP collections also feel like there's ways for them to basically now invest in, diversify, build other ways of monetization. I think smaller creators may not have those resources to do it, right? So I think for them it becomes what is, it's a different strategy to approaching NFTs now. And I think we talked about it. It's like thinking about how to maximize on the primary instead of relying on sub-secondary.

And then there's obviously a large category of art, one of one, that kind of stuff that, yeah, generally I'm absolutely more like empathetic and supportive of royalties for them because it's a different type of NFT or different type of creator. And that's why I think the broad brushstrokes of like, oh, Emmy is, is anti-royalty. It's actually not true at all. I think we are generally very, very pro, like, whatever the best. way is to the different creators to make money and to support themselves. I think it varies depending on the type of entity. I think it's very complicated. Yeah, I was going to say, I feel like this policy

is definitely going to be the worst for kind of like more of those higher end creators, whereas like the lower end mass market ones, like I feel like it's not going to be as big of a deal for them because they can just make like, yeah, 10,000 whatever and, you know, make a lot of money from that. But yeah, kind of more of like a, just like an artist artist is going to have a lot harder of a time with this. I think it's also one thing that I'll just throw into the mix here. I agree with a lot of what Joshin just said. I think it's also interesting to note that what we've seen in the market is that a lot of times

buyers actually do want to pay royalties. Like when X2Y2 made the change to being optional royalty, instead of actually settling at 0% royalties paid to creators, instead, I think the historical average has been 1.5%. So buyers are actually paying more than they actually need to in order to pay creator royalties. And so I think culturally, culture is another variable in here that we can use. Wait, on X2, Y2?

I thought X2 y2, they let the holders set the royalty rate. Yeah, there's two, there's two mechanisms on X2. 2. Why two? It's um it's one, it's paid on the by side. So similar to magic Eden. And the two is they let holders, um, effectively have a governance vote at certain time cadences or epochs and say like, hey, I'll come around the time period. Maybe it's a week. This week holders have voted to, to turn on optional royalties or this week holders have voted to to not have optional royalties. And then that basically decides what the royalty model is on that collection. Yeah. Yeah. Yeah. Yeah. Yeah. So, I mean, look, there's a lot of experimentation now, right? People are trying different models. I do think at the end of the day, like, look, any, if you are a student of history, even just in blockchains, I think it's very easy to tell where this is going, right? Which is going to be that creators are going to have to find enforceable ways to monetize. Like, if it's not enforceable in the long run, it's going to get forked out. And that's basically what you're seeing is happening now. Like, at the end of the day, like, okay, there's thinking from the perspective of a creator, thing from the

perspective of, hey, wouldn't it be better for the world if creators were aligned, if they were able to capture more of the value they create? There are a lot of good reasons to like royalties. But the end of the day, all this stuff is built on blockchain technology. And the technology is poking out from under now. That's what's happening. It's peering through the surface that we thought, oh, NFTs are this like magical thing that do all these wonderful things and align incentives. And now the technology is poking through and say, hey, not so fast, actually. You guys didn't do what you thought you did. You didn't make this enforceable on chain. You didn't make it that the code enforces of this stuff. And in fact, it's impossible to do so. And unless you actually solve the problem,

unless you actually solve the incentive alignment in a deep way, it's going to fall back to the natural thing, which is that competition is going to be the primary force that affects the way NFTs are bought and sold. So, look, to your point, I would love to see people who innovate on more models. And I think we're seeing that happen. We're seeing more people come up with different ideas about how to think about royalties, how creators can monetize There are a lot of people working on fractionalization, which, again, I do think is potentially part of the answer for how you might monetize one-of-one collections. I mean, look, it's complicated. The nice thing about royalties to Lee's point is that lawyers is a really simple, really simple to understand, really simple story.

Everyone loves that story. But the story was bullshit. Like, the story is not going to just magically enforce itself unless everybody just shakes hands and all agrees, yes, we're all going to do royalties forever. And we've already seen that's not going to happen. obviously there was a time when music was like seriously pirated by, you know, tons of people and then now everybody pays for it. It still is. Right?

Well, but I mean, is it like maybe I'm just? Yeah, under streaming, I think there's less piracy. Well, yes, yeah, in the U.S., but, you know, BitTorn is still one of the largest sources of uplink in the world. Like lots of people still pirates stuff, just not in the first world so much. Okay. But I think, you know, still, most of us probably have seen. either a shift on our own behavior or people we know from stealing music to paying for the music, right? So, you know, Haseeb, when you keep talking about how these royalties have been

enforced by norms previously, and since it's not possible to enforce by the technology, that's why this norm is going to go away. Like, I just wonder, well, why isn't it that, you know, music streaming, that became a norm as opposed to piracy? So, like, why isn't there a norm? norm in this direction, you know, in what is the morally... Are you arguing that you think that the idea of streaming rather than downloading was a norm that users decided, you know what, we're going to all agree to stop pirating and do the right thing by streaming instead. Is that what you're claiming? I mean, I don't know if I'd phrase it that way so much is just like a lot of people

changed their behavior and stopped pirating and instead started streaming and they're paying for money. So art for music. Yeah. So I think Daniel Eck, the CEO of Spotify, explains very well because he actually originally before he started Spotify he ran a BitTorrent company called UTorrent which was like literally one of the best BitTorrent clients way back in the day and then he ran Spotify and he had this idea that the problem with torrenting is not that users

really hate artists and they want to punish artists and they want to do all these terrible things the real thing is that users are lazy and they don't want to think about this stuff when they're sitting around clicking on okay I want to buy this NFT they're not like they don't want to sit around and think oh you know this artist can be able to make their rent they just want to buy the NFT when somebody's going

around clicking on Spotify. They don't sit around thinking, oh, how much of a royalty is the artist getting? Am I hurting them by downloading this thing or not contributing to the Patreon? They just want to listen to the song. And so if you just make a better experience, people will use it. And that's, that was the vision behind Spotify, is that you don't need to make this big moralistic argument. You don't need to get the RIA to sue teenagers in order to get people to stop downloading music. Just make a better experience and people will come. And that was the Genesis Pine Spotify. And I think it's exactly the kernel of what I'm talking about is that the way that creators win in the long run is by creating experiences that work. If royalties don't work, then fine, kill royalties, find the next thing.

But it's not going to be by saying, look, you guys are bad and evil because you're not paying royalties. That's not going to get you anywhere. If you look at the history of technology, it's never how these things have advanced. Yeah, I still think, though, that when you get rid of royalties, then it does change the incentives for creators. And so even if buyers don't like necessarily see up front some kind of degradation, that over time that's really actually what's going to happen. But it's like something where it's too separated from like their economic activity. So they're not going to realize that that's the cause of that. Right. That's fair.

Okay. Well, I want to give Joshin the last word since you're kind of the man of the hour with everything happening with Magic Eden. So do you want to give us a nice little wrap up with a bow? on this whole discussion. The peacemaker also. Yeah, I guess I'm the peacem. Yeah, we shouldn't have an end on me or Haseeb because then it'll be perceived as like one of us winning. Yeah, I apologize for how much I've been monopolizing.

Yeah, I mean, my, our view is that, yeah, again, let's not have a super extreme, you know, two ends of the spectrum kind of discussion going forward. I think that's the thing that we are trying our best to kind of change that narrative a little bit. because we are absolutely pro-creator. We like royalties as a business model. They're just not enforceable today, so that's just the reality. And are there ways to encourage people to pay royalties?

Yes. Do we want that to happen? Yes. Do we think that that could still be a viable business model in the future? Yes. I'd encourage any creators who are willing to actually try out new things to either try and protect or try new business models, just give us a shout.

Because even when we went to this model of optional royalties, we had plans to basically launch projects with 20 plus collections in the next month. And the vast majority of them still want to work with Magic Eden and find ways to build the longevity of their project. And we are in that business too. And that's a commitment that I think we have that we can absolutely say is true today. But I'm glad this opens up this conversation, to be honest. It was bound to happen sooner rather than later. And at this point, we have always prided ourselves to be pro-innovation and trying things out and building in the public. This is the rawest form of that.

And yes, we got a lot of criticism and lots of different perspectives. But I'm excited for the future. I think I'm as bullish on NFTs as I ever have been. And wait, I am so curious. I know you have like practically no data points. But since you made that, so did this take effect immediately? Yeah, this happened on Friday. Okay.

So in like the last day and a half since it kicked in, what percentage of trades paid royalty? I don't have the data on it. Oh, okay. I'm so curious. Yeah. Because like we'll have to do a follow-up conversation. Yeah. Yeah.

That's right. That's right. I'll tweet it on the, yeah. Yes. please do because the optional bit makes me think like it's probably not really going to happen because like I wrote about like the Dow incident in my book and like one of the things that always struck out at me or stuck out at me was that these people like the White Hat group that just like kind of gave over their lives basically to try to rescue all the money for all the different

Dow token holders and they I mean they were working like 14 16 hour days for like a few months And it just really was like super stressful for them. Like they there was so much intrigue and weird stuff going on that some of them were like, you know, they had all these legal threats. I mean, it was like a big super, super stressful time for them. And at the end of it, when they created the contracts where you could get your refund, there was an optional donation. And they ended up making like 500 bucks each basically for their like months of kind of like sacrificing just like their whole entire lives. over to doing this for people. And that was all I made. And it's like just kind of sad. And I don't know. So that's why I'm like, I feel like the optional thing is not going to be lucrative for people.

But anyway. I think we should circle back in a week and check the data because I'm actually more optimistic that hopefully buyers will want to pay royalties. It seems like for me, he's like, I'm going to go all in on Magic Eden. I'm not paying for royalty. Yeah.

I think I'm on the lower side. I have very low confidence in humans, but generally, that's the dispositional thing. Ashley Hasib and Joshin, I have a question for you. And it's something that I actually don't really know the answer to. So I know that my argument in the beginning was more moralistic, as you guys called it. Do you guys think that creators do deserve royalties, but just like it's impossible. So it's like not worth going there?

Is that your position or is it that like they don't even deserve them? I don't like the concept of deserve. I think royalties are a better way to align incentives, but I don't think they're enforceable. If you can enforce them, then great, but you can't enforce them. Yeah, exactly. I agree.

So I don't really know what your answer is. I mean, like the concept, do creators deserve, like, what's the royalty, right? Yeah, like, meaning, what's the royalty rate? What's the velocity in the market? Like, what was the primary price? Like, I think all these things, I don't know what. Let's give that example.

of the musician where they made this song and then it wasn't until seven years after they produced it, that actually finally it kind of was making money for them. So obviously the time they initially released it, they only made X amount. And so do you feel that once it became valuable and people were interested in it that they shouldn't share in that in this financial value of that song in the future? Do you think that they should or should not? I mean, look, we have a really strong intuition around fairness that like somebody who like later becomes discovered as being great should be able to, to make some money from that and kind of, like it's very much the American spirit, right?

Like if you, if you end up becoming successful, you should get paid. You should get your payday. Now, that is not what most people who have royalties are, like most people who have royalties are not somebody who gets discovered five years later and like their NFT collection takes off. Most people is just like they're getting, you know,

I don't know, 50, 100 bucks a month. And it's not a material amount of money, especially compared to their primary where they made, you know, tens of thousands or even maybe $100,000. To Jocin's point, that's what the math looks like, and it's trending more in that direction. Right, but for the people who would fit in that category. Yeah, I think for people who would fit in that category, like, that sucks.

Like, that's such as, it's so disappointing. It's like a Herman Melville type person, right, who like was undiscovered and kind of ignored in their time and later becomes like a great hero to many people. Like, it pulls out of heartstrings to hear those kinds of stories. But I don't think you can make decisions about an entire market structure by appealing to really sympathetic stories and saying, but isn't it so awful for that person who got royalty seven years later? Like, we should have royalties. Okay. Okay. You're just a lost cause. I mean, you can try. You can try. But like, it's, we're telling you, it's not going to work.

Like, you need to come up with something else. So the last story that I want to leave you with is that one other story that came up in my research was that there was this artist who worked hard to, you know, ensure that there were royalties and, in secondary sales of NFTs. I think his name was Matt Kane. And he told me that, like, when he kind of initially tweeted about his campaign, that a 70-year-old artist, who's like pretty famous, messaged him and said, oh, my gosh, like, this would have been a game changer for me. You know, I'm in my 70s. And when I produce work, I'm competing against stuff I created when I was like 20, 30, 40, 50, 60. That now goes for like millions. And I don't, I obviously didn't. He, you know,

didn't sell it for those millions. But now the collectors are making those millions. And he has to keep working because he doesn't have enough money to just sit back and rest on his success. Because other people are making that money from his quote unquote success. Well, he doesn't actually have the financial rewards from that success. And so he actually has to keep producing in order to like make the money. But, you know, like I said, like just anyway. So the point is that, again, I just feel like there's a problem here. It can be. resolve somehow. And it just surprises me that, yeah, you're, you're like so realistic to the point of just being like, it's going to happen too bad. And I'm a little bit like, no, no, no, no,

we should really, really work to, you know, use this technology for, but whatever, anyway. Yeah, look, I, I can tell the thrust of this is that like, okay, I'm heartless and you care about the plight of creators and I don't. Kind of. I mean, look, I, I, I mean, look, I, I, I, I, I just don't think that, like, royalties are your answer. Like, royalties, if they worked, then amazing, they would be your answer. But they're not your answer. Like, they don't, yes, it'd be wonderful if we had this beautiful little mechanism that solved all those problems and dried all those tears, but that we don't have that.

So we can't just sit around wishing that it existed if it doesn't. Like, I agree with you. I wish there was a better way to align incentives for creators who later become discovered, even if they're, you know, whatever. The idea of an elder artist who's competing against himself in his 20s, that is a heartbreaking story. That sucks. And yes, I can imagine what that. I think a possible outcome that reconciles all of our views is that the market basically bifurcates. And it bifurcates into like speculative flippers and just like kind of thousands of PFP collections that get traded for very no royalties.

And then on the opposite side of the spectrum, there's like the fine art, visual art, like more independent creator type of premium creations for which the buyers are, A, like more intrinsically motivated to support the creator, and be less price sensitive because there is a collectibility aspect to what they're purchasing. And in that latter market, I think royalties are still going to continue to be a prevalent part of that market. So I think that's like an outcome that I see probably happening. And my bet is on the latter side growing and becoming.

bigger and that being what attracts more consumer users into Web 3 in the first place. But I do think both outcomes will happen in tandem. You know what? I think I agree with that. I agree with that. Yeah, it's pretty reasonable. Yeah, I think it's very likely that because in smaller communities, you can police this stuff, right? Like, you know, I gave a lot of criticism to Magic Eden for what was it called?

Meta Shield. Yeah. On this show, we were criticizing Magic Eden because I thought, like, look, this is not the answer, is to create this market surveillance thing. And we talk about what is realistic for creators to do? Creators, like, monitoring every single send of their tokens. Like, that's obviously not a realistic thing that the average musician is going to be able to do. Nor should they want to.

Like, that seems like an awful way to be spending your time. Like, at the end of the day, if you create a tight community of people who believe in you, people who care about you and people who want to reward you for what you're doing, right? Like, it becomes more like patronage and less like a pure consumer transaction. Now, in the larger scheme of the market, most things are not patronage, most things are just consumerism, right? Most people are just buying stuff because they want to buy stuff. Like for Spotify, somebody who's clicking on a song on Spotify, yes, they are paying a very small royalty to the person they're streaming from. But mostly it's a commodity, right?

It's a consumer behavior. They're not building a relationship with the artist. If you want to build a relationship with the artist, if you want to join their NFT community, then yes, you buy and sell in their marketplace, you opt into the royalty and you show other people that you are, giving your patronage to that person the same way everybody else is. I think that that is a stable equilibrium. But it's not going to be, it's not going to be every marketplace enforces this for you. You have to, as an entrepreneur, you have to, as a creator, you have to figure out how to do that yourself, how to cultivate the community where people want to do that for you. Oh, wait. I just had another idea. I thought, I bet if this gets bad enough that there could be

entrepreneurial creators who decide to kind of band together and create their own marketplace and do it in a way that honors royalties or whatever. And then they would probably get a lot more of the really good creators on their platform than the other ones. And so that could be, and it could be like some kind of decentralized ownership where creators can like, you know, vote on whatever. Anyway, so it would be a marketplace that is more creator-centric that kind of caters to what they want. And that, you know, as Lee and I have been saying, like, when you have that, when you're the one offering the unique thing, that isn't the same thing that everybody else offers. Like, it just makes you so much more valuable.

So I could see a bunch of them banding together. Maybe, you know, maybe I'll tweet about it and see if I can. I think that's possible, definitely. Like, if a new marketplace or an existing marketplace starts to, like, enforce royalties and then becomes a magnet for creators, then I think it starts to force everyone else's hand as well, just like you've seen the proliferation of like creator funds, platforms coming out with multi-billion-dollar creator funds to pay their top creators. Like, I think the market ultimately is going to be creator-driven and do what is most

creator-friendly because that is going to be the scarce side of the marketplace. Yeah, I feel like they have leverage. It's just that, you know, creators, they want to create. They don't necessarily always want to be entrepreneurs, so we haven't seen it yet. But I would, I will look out for that in the future. And if any creators making such a thing, want, you know, to pitch me about their project, I'd be interested in learning more and featuring it on my show. Very cool.

Very cool. Well, this conversation doesn't end here. It continues on Twitter and in the Metaverse. But I want to thank all of you for coming up and showing up for this pseudo debate. I think we got a little bit of convergence in the end, which is good, but not intended. But until next time, and hopefully, Joshin, we can get some of the data that you promised us. And let's see how this experiment plays out. Yes.

All right. Thanks. Thank you, everybody. Thanks, everyone. Bye. Bye.