Interpreting the NFT royalty dispute from the principles of economics
Sudoswap has ignited the royalty war, and it is not over yet.Written by: Beichen, Chain Teahouse
Sudoswap has sparked a royalty war, and it is not over yet.
The reason is simple: during a bull market driven by FOMO, everyone is focused on how much they can multiply their investments, and no one cares about the trivial royalties. In fact, royalties have always been promoted as an advantage of NFT collectibles, but in a bear market, where the competition for dwindling activity has intensified, trading platforms have turned their attention to royalties, and it has indeed proven effective.
Opponents have not only won on an economic level but have also taken this verbal battle to a moral high ground, thus gaining an absolute advantage.
Of course, I am not a fervent supporter of royalties. In fact, I believe that over 99.99% of the NFT collectibles circulating in the market should not have royalties set, as these NFTs inherently lack value. I just feel that it is meaningless for a group of people who neither understand NFT collectibles nor the market to discuss the NFT collectibles market, akin to a war on a snail's horn.
There is a small fable recorded in "Zhuangzi," where on the left antenna of a snail is a country called Chushi, and on the right antenna is a country called Mansi. The two countries often wage wars over land, resulting in tens of thousands of casualties, and it takes fifteen days to chase the defeated soldiers back. This war can be described as grand and brutal, but it occurs on a snail's horn, which holds no significance for us.
This article does not aim to evaluate the value of NFT collectibles but rather to explain the impact of NFT royalties on the market from an economic principle perspective. Therefore, this is a popular science article about the market itself, hoping to dilute the debates that exude a peasant mentality and planned economy biases (such biases are common in life but are quite unexpected in the NFT field).
The basic operating principles of the NFT collectibles market are similar to all markets, with the most fundamental being supply and demand. When many consumers and producers gather at a specific time, a market is formed. The NFT collectibles market will at least adhere to the following principles:
1. In a perfectly competitive market, no single buyer or seller can determine the price; the market price is entirely the result of competition.
Retail investors naturally position themselves as buyers, imagining all sellers in the market as an unbreakable interest alliance that controls supply and thus controls prices.
However, the market is not merely a game between one buyer and all sellers; in fact, there is also competition (bidding) among buyers, and even more intense competition among sellers (for example, between OpenSea and X2Y2). The final market price is determined by the supply and demand of everyone in the market through countless transactions.
In other words, there is no trading platform (or alliance of trading platforms) that must seize money from buyers; if the price on a trading platform is unreasonable, buyers will naturally flow to platforms with reasonable pricing. We should let the market decide the power dynamics rather than arbitrarily deem it reasonable or unreasonable.
2. The difference between a monopoly market and a perfectly competitive market lies in the entry mechanism.
Retail investors lack the concept of a "perfectly competitive market" and equate the market with a monopoly market, leading to moral criticism. Therefore, they will cite many examples of monopoly markets to refute the previous principle.
On the surface, a monopoly market has only one or a few institutions determining market supply and holding market control, which seems to fit the definition of the NFT collectibles market perfectly.
However, whether it is a monopoly market depends on its entry mechanism. For instance, if a village has only one small shop, you cannot conclude that this shop monopolizes the village's retail market without analyzing whether the village is too small to support two shops or if the shop owner is a local tyrant preventing others from opening shops to compete.
Similarly, you cannot determine that the current structure of the NFT collectibles market is a monopoly market; at least, this market is open and competitive, with the result being that OpenSea dominates.
3. Taxing buyers and taxing sellers have no difference in effect.
Royalties are embedded in the actual payment price; whether collected from buyers or sellers, a portion of the final transaction price is taken. What truly affects the transaction is the actual amount paid by buyers and the actual amount received by sellers.
It's like the commission when buying a house; whether charged to the buyer, the seller, or both, there is no difference. Buyers will consider their total expenditure, and sellers will consider their total income, ultimately forming a relatively balanced price. Another example is whether there is shared area in a property; the actual price paid by buyers remains high, with the only difference being that eliminating shared area removes a confusing charge.
Thus, X2Y2 offers buyers a zero-royalty option, but in effect, whether the royalty is waived for buyers or sellers makes no difference; it simply means buyers pay less and sellers receive more.
4. Whether the tax burden is borne by buyers or sellers depends on who is more sensitive to price.
The previous point indicates that royalties are shared by both buyers and sellers, but the specific proportion depends on the elasticity of the supply and demand market. In other words, the party more sensitive to price will bear less of the actual royalty burden.
For example, in the low-profit manufacturing industry of socks, manufacturers' profits are only a few cents, making them more sensitive to price changes. They need to ensure that the actual amount they receive is above a certain threshold, while consumers may not mind a few cents or a dime increase. Therefore, if an additional sock tax is imposed, most of the tax burden will actually fall on consumers.
However, luxury goods are different. For instance, the market supply of yacht companies is relatively stable, while consumers purchasing yachts are elastic (they have many substitute products, such as luxury cars, villas, planes, etc.). Therefore, if additional taxes are imposed, yacht prices will not rise significantly; instead, the yacht companies will bear the tax burden.
In the NFT collectibles market, due to the vast differences between collectibles, a specific analysis is required. However, if a collectible has value, consumers are willing to bear more royalties to obtain it; if the value is relatively low, royalties will accelerate their withdrawal.
5. As long as there are taxes, there will be deadweight loss.
The existence of taxes causes buyers to pay more, leading to a decrease in the number of buyers in the market, while sellers receive less, resulting in a decrease in the number of sellers. Therefore, taxes will suppress trading behavior, and the reduced transactions are deadweight losses.
The magnitude of deadweight loss is determined by market elasticity; the greater the elasticity of supply and demand, the larger the deadweight loss. The NFT collectibles market is a typical example where both buyers and sellers exhibit high elasticity, thus the existence of royalties suppresses a significant volume of transactions.
Conclusion
The existence of royalties in the NFT collectibles market suppresses transactions; eliminating royalties can stimulate transactions.
Royalties for NFT collectibles should not be directly equated to taxes, as royalties go directly to creators. Collecting is a form of cultural consumption, and those who criticize royalties equate collectibles entirely with financial products or consumer goods, thus undermining the rationale for royalties.
The differences between NFT collectibles are even greater than those between species, so the question of "whether royalties are suitable for NFT collectibles" is a false proposition; it should be whether a specific series of NFT collectibles is suitable for royalties.
As for whether to eliminate royalties, that should be left to the market to judge, rather than moral considerations (this applies not only to ordinary collectors but also to creators). Since we have entered the crypto industry, we should respect market laws and value creation.
