The focus for many artists entering the NFT space has been on the potential of royalties and how that can be programmed into the smart contract to earn them a percentage of resales down the line… forever!
That’s great, but what if there were a way to reward collectors in a similar fashion for investing in the artists work? I’ve developed a model which could do just this by a 3 stage reducing royalty system.
Let’s say for example the artist sets their royalty amount at 15%. This system would mean that consecutive buyers of that piece can earn a % as the work moves down the line too. But first I’ll say this is not to encourage flipping of work because I do believe when it comes in particular to art that it should be displayed and enjoyed. But the reality is that some equally love the investment aspect, the hunt for something beautiful they can own and enjoy for a period but also sell at a profit to then seek out and buy other beautiful work. Some will hold and enjoy for longer than others and that’s up to them.
Either way this model benefits everyone but admittedly has more immediate advantage to items such as collectibles that might be traded more readily down the line to different owners. However some art can also ramp dramatically in price over only 5–10 years and if you got 3, 2 or 1% of one of those it can still be a nice payout some 10 years down the line!
So how does it work!?
The 1st owner Bob loves the piece but for personal reasons decides to sell a year later to the 2nd collector Fran for twice the price, nice. 15% of that sale goes back from what Bob earned to the Artist. Nothing new, that’s how it currently works.
Fran some time later decides to sell to the 3rd collector, but this time only 12% goes back to the artist and 3% goes to Bob the 1st collector.
The 3rd collector sells to a 4th collector, that first collector now gets a second kickback of 2% (the 2nd owner gets 3% and the artist 10%) so the 3rd collector is still paying the 15% royalty in total.
When the 4th owner sells… the 1st owner gets a third and final royalty of 1% (the 2nd owner gets 2% the 3rd owner 3% and the artist gets 9%).
So you see it tapers off as the work continues to resell down the line.
By reducing the artists royalty as shown by 3–6% on resales between owners 2–5 it compensates and ensures the total is fixed at 15% (or whatever the % set by the artist) but after it reaches that point it would remains at 9% ongoing.
You might be asking at this point… so why not just set it at a flat rate of 9% in the first place?
The benefits here for the buyers over just a flat rate of 9% (using the above example) is that as you receive your 3% then 2% then 1% kickbacks… the value of the work should theoretically be reselling at higher prices and therefore you’re earning back more than if you’d just paid the lower flat rate on an artists royalty!
It incentivizes a secondary sales market but the buyers rewards are not ‘so great’ that it would encourage quick ‘flipping’. It does however encourage buyers to continue supporting and promoting the artist even after they’ve sold a piece of their work and to invest into more of that artists work because the more ‘demand’ generated for that artist, the better their return might be on those 3 kickbacks of 3, 2 & 1%
I might come back and add a chart to explain this visually soon.
Practically this is all possible but even artists royalties are not standardized to transfer with NFTs that migrate across platforms but I’m confident that day will come.
p.s. for coming up with this idea all I ask for is 0.01% royalty on every sale that uses this system 😄