Controversy Surrounding NFT Creator Royalties and Smart Contracts

01.30.2023

 Market Overview:

This is a catalyst packed week with the Fed meeting on Wednesday Feb 1st, release of important economic indicators including PMI, ISM, employment data and earning releases by the tech heavy weights Meta, Apple, Google and Amazon.

It seems clear that inflation is trending downwards, though employment and wage pressures still remain stubbornly high relative to Fed targets. Acknowledging easing inflationary pressures and deteriorating fundamentals, the Fed has softened its hawkish stance and expectations are that it would reduce the magnitude of rate hikes. Although not even a full month on the year, the market has reacted strongly across risk assets, much of it driven by short squeezes and underweight positioning. Bitcoin is up 40%, Nasdaq up 9%, S&P 5%, and Investment Grade Credit up 4% etc Year to Date. Crypto, which is strongly correlated to liquidity conditions, is the best performing asset class which is no surprise.

There-in lies the key risk going into the Fed meeting. The market may have gotten ahead of itself for the Fed’s liking. The Fed has already laid out its “higher for longer” road map whereby the interest rate hikes would transition from fast paced to a more measured pace and then remain anchored to the terminal rate for some time. The market, now focused on recession, doesn’t appear to believe the Fed and is pricing in rate cuts starting in September. There is a strong possibility that in the press conference, Powell will be more hawkish and re-tighten financial conditions.

For that reason, we could potentially see a healthy short term correction in crypto (and all risk assets). Note that a large part of the rally since early January has been driven by short liquidation and this transitioned into a broader based rally across sectors plus strong individual narratives. But crypto has hit a resistance level prior to the Fed meeting, and long liquidations have led to cascading sales this morning. It’s also interesting to note that year to date, ETH has underperformed BTC which is not a typical scenario for a sustained risk-on, broad based rally.

NFT Market News:

Artists and Collectors Debate the Future of Royalties for NFT Sales

With the recent popularity of NFT trading platform Blur, the debate around whether royalties should be optional or enforced through smart contracts has become a hot button issue. When using Blur, the buyer decides whether the artist receives royalties on the secondary sale of their work. Since many artists rely on royalties as a primary source of income, artists have begun to use smart contracts to program lifetime royalties into their NFT sales, ensuring that a percentage of their profits would automatically be delivered to their crypto wallets in perpetuity. This solution allows artists to protect their intellectual property and receive ongoing revenue for their creative work. The use of smart contracts-based NFT royalties has been widely adopted by independent artists and has become a Web3 antidote to the exploitation that creatives have faced for years.

However, building the infrastructure to execute this vision has led to several challenges. Perpetual creator royalties may be great in theory, but there are logistical hurdles to enforcing them on-chain. Smart contracts, which enforce creator royalties, are a type of blockchain-based code that executes instructions of a pre-determined agreement. However, smart contracts are not legally binding in all circumstances. They are structured as a set of if/then conditions that execute according to specific inputs and triggers. Governments can decide whether and when to recognize them as legally binding documents, and Ethereum co-founder Vitalik Buterin has even said that a more accurate description of smart contracts is “persistent scripts.”

In recent months, there have been several controversies surrounding creator royalties in the NFT market. Some NFT marketplaces such as Blur have made  creator royalties optional in an effort to attract more buyers. This has led to backlash from artists and NFT community members who believe in the importance of creator royalties as a means of protecting their intellectual property. OpenSea, on the other hand, has doubled down on its commitment to royalty payments by blocking NFTs minted on its platform from being resold on secondary marketplaces that ban royalties. This move has been interpreted as an attempt by OpenSea to keep all sales on its own platform. However, OpenSea CEO Devin Finzer responded by saying that the move was an attempt to give artists more control over where their art is bought and sold. Artists have become vocal on social media and rallied in support of creators’ rights to control their own royalty structures.

While smart contract-based NFT royalties hold notable potential for creatives, there are still challenges to overcome. The NFT community continues to push for a fair and transparent system that protects the intellectual property of artists and ensures that they receive ongoing revenue from their creative work.

Latest News:

Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking this metric in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:

• The California DMV is testing the digitization of car titles and transfers through a private Tezos blockchain in partnership with Tezos and blockchain firm Oxhead Alpha.
• Binance is partnering with Mastercard to launch a prepaid card in Brazil. The card will allow payments with 13 cryptocurrencies, including bitcoin, ether and Binance USD.

REGULATORY ROUNDUP

We’re living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and exerting political influence.

• The SEC has charged Genesis Global Capital and Gemini with offering unregistered securities through Gemini’s “Earn” program on January 12th, 2023.
• South Korea’s Ministry of Justice plans to start tracking crypto transactions as it looks to crack down on money laundering. The ministry will initially use third-party software to monitor transaction history, extract information on transactions and check the source of funds. It plans to develop its own system, which should be ready in the second half of the year.

Disclaimer: The views and opinions expressed herein are those of the author alone and do not represent Wave Digital Assets LLC or any of its affiliates (collectively, “Wave”). The author and/or Wave may hold investment positions in some of the assets discussed. Nothing in this material or linked information should be interpreted as an offer or recommendation to buy, sell or hold any security or other financial product. This material is not intended to provide accounting, legal or tax advice. Certain information contained herein has been obtained from third-party sources, has not been independently verified and should not be viewed as being endorsed by Wave. Such information is believed to be accurate as of the date of its publication. No representation or warranty is made, express or implied, with respect to the accuracy or completeness, and readers should not place undue reliance on the information contained or linked to herein. Certain statements in this material provide predictions and there is no guarantee that such predictions are currently accurate or will ultimately be realized. Past performance is not indicative of future results.

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