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NFT Royalties Explained and Why Immutable Supports Them

The blog text title reads: The Importance of Enforceable Royalties Explained and Why Immutable Supports Them. The image depicts a glowing orb of nodes in a dark space. The article explains the importance of Enforceable Royalties in web3.
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For centuries, royalties have been the backbone of creative economies, allowing creators to capture sustainable revenue streams and continued value from their work.

Monetization models in the gaming industry have evolved dramatically through digital distribution, the emergence of the free-to-play model and microtransactions, and extended lives via additional downloadable content (DLC’s). 

This shift has propelled gaming into one of the biggest recurring revenue generating industries in the world. However, there are a few key limitations in the current web2 model of gaming such as the lack of true digital ownership for players and a failure to address secondary markets. These gaps mean leaving potentially huge amounts of revenue on the table for developers.

At Immutable, we believe that digital ownership should benefit players and game studios. In order for that to be true, enforcing royalties on in-game assets can’t simply be a nice to have — it is an essential requirement to provide a more equitable and sustainable income model for developers.

But to bring about  this future, we must first understand how we got here.

The Web2 Royalties Model is Broken

In the 2000s, the gaming industry underwent a seismic shift, ushered in by giants like World of Warcraft, The Elder Scrolls IV, and FarmVille. By pioneering subscription models, downloadable content (DLC), and microtransactions, these games opened a pathway to consistent income beyond the revenue driven from initial game launches.

Today, these monetization models are industry norms, embedded in the thriving MMORPG and free-to-play game genres. High-profile releases often introduce post-launch content, while microtransactions offer significant return potential when effectively marketed to a large player base. 

Fortnite, since its free-to-play launch in 2017, has generated close to $10 billion within two years from in-game assets sales. 

However, this shift has failed to address the need for true digital ownership, fuelling the rise and growth of grey markets where players can monetize their gaming efforts by buying and selling in-game items for direct cash. This prevents developers from being rewarded from continued sales beyond the initial transaction. 

Restrictions preventing direct cash sales on Valve’s Community Marketplace have led games like CS:GO and DOTA 2 to become notorious for their gray markets, where top-tier items can net up to half a million dollars.

Remarkably, the CS:GO Steam market alone has generated $32 billion of trading volume since 2019. That’s 660% more than the combined revenue of the top five NFT collections.

Sounds like a big win for Valve, right? 

Unfortunately, that doesn’t take grey market trading into account.To illustrate, Valve game developers earn just a modest 5% cut from all transactions on its Steam Community Marketplace. Meanwhile other grey market sales may result in zero royalty payments for creators. 

Why Gaming Needs Creator Royalties

Web3 gaming has the potential to redefine the industry via true digital ownership and secondary royalty structures. By leveraging blockchain technology, players can fully control their digital assets, trading them freely within secondary markets. This enhances the game's ecosystem, driving player engagement and increasing the value of in-game assets. 

Through smart contract-based royalties, developers also stand to benefit from every future trade of their game's assets. This model creates a mutually beneficial relationship between players and developers, paving the way for a more prosperous gaming industry. 

Players get the true ownership they crave, alongside the freedom to monetize their gaming efforts, while developers gain a more sustainable and fair income model, bolstered by the engagement and economic vibrancy of their gaming communities. 

A win-win for all. 

Through enforceable royalties, web3 gaming is poised to be the catalyst that will usher in a new gaming industry that is inherently equitable and sustainable for game developers; one where creators are empowered to rightly capture and realize the ongoing value of their creations in perpetuity. 

Web3 Royalties Spark Debate

However, not everyone shares this vision. Royalties in web3 have sparked debates and controversy with some  participants advocating their removal from NFT collections and marketplaces. Some marketplaces have yielded to these pressures, making royalty payments optional for secondary NFT buyers and leaving creators without the ability to continuously earn from their works. 

While initiatives like the Royalty Registry aim to enforce royalties on NFT transactions, broad enforcement remains challenging. Current NFT royalty standards, like EIP-2981, allow marketplaces to set intended royalties but lack enforcement. Hence, royalty payouts depend on the sale handling application, not the original smart contract, making payouts subject to marketplaces.

How Immutable Supports Enforceable Royalties (And You)

To address this issue, Immutable has made the conscious commitment to enforce all creator royalties across its ecosystem. By partnering with us, game developers can seamlessly integrate enforceable royalties into all NFTs minted on our platforms, and even customize their implementation within gameplay mechanics.

The best part? Royalties are paid, irrespective of the marketplace. While some offer optional royalties, NFTs minted through our platforms ensure creators get royalty payments, facilitated through our Orderbook. This benefits both players and developers as our ecosystem grows.

Join Immutable

With the momentum of web3 gaming accelerating, there's never been a better time to join the growing Immutable ecosystem. Connect, play, and build within the world's largest web3 gaming platform. 

The future of gaming is here, and it's powered by Immutable. Are you in?

If you're eager to join us, we invite you to explore our Developer Hub and create an account today.

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