Magic Eden, the largest non-fungible token (NFT) marketplace in the Solana ecosystem, has moved to make paying NFT creator royalty fees optional, following in the footsteps of rival marketplaces which have eaten into its market share in recent months.
The platform will also be waiving all platform fees for the foreseeable future, Magic Eden said in a Twitter thread announcing the changes on Saturday.
Anndy Lian, author of the new book “NFT: From Zero to Hero,” told Forkast the attempt to win back users by lowering or removing fees surprised him as he was doubtful of the long-term sustainability of the plan.
“For [an] NFT platform, where the secondary market is at a really bad situation right now, I am doubtful whether the zero fees are going to work very well,” he said.
Total secondary sales of NFTs have fallen for five consecutive months amid the ongoing crypto winter, forcing creators and marketplaces to re-evaluate how to survive what could be a lengthy bear market.
NFT royalties give the original creator a percentage of the sale price each time that NFT creation is sold.
Magic Eden is a giant in the Solana ecosystem, controlling roughly 90% of all sales, and almost nine times the Solana sales of leading NFT marketplace OpenSea, which added support for Solana NFTs in April 2022.
Magic Eden also raised US$130 in series B fundraising in June, bringing its valuation to US$1.6 billion, and cementing its status as a “unicorn,” a privately held start-up with a valuation over US$1 billion.
Smaller marketplaces such as Hadeswap and Solanart have begun eating into that market share recently, according to data aggregator Tiexo, offering more competitive fee structures for users.
“This is not a decision we take lightly,” Magic Eden said in a tweet announcing the move, while also acknowledging the industry has been slowly moving towards optional creator royalties for a while. “We understand this move has serious implications for the ecosystem. We also hope it is not a permanent decision.”
Royalties for NFTs are typically set to between 5% and 10% and are often encoded into the smart contract of the NFT itself. Marketplaces are able to rework the code around the sales of these NFTs, however, effectively allowing them to set the fees to whatever they like.
In the case of Magic Eden now, that fee now will be left up to the user to decide whether or not to pay. However, if users choose not to pay the fee, they risk being excluded from the full utility or perks of owning the NFT, the platform warned.
Lian told Forkast that marketplaces enforcing this fee structure helps keep NFT prices low. In other words, if a creator knows they will continue to earn royalties over the life of the NFT, they can afford to set a lower initial asking price.
Removing this structure incentivizes creators to lift their prices in order to compensate for this loss of income, he said, which could add extra pressure to an already struggling market that is currently extremely sensitive to pricing.
The issue is compounded if smaller marketplaces follow Magic Eden’s lead, which Lian said they will be incentivized to do.
“So, it goes back to the whole equation: How long is this bear market going to be and how long can you sustain that kind of strategy?” Lian said, “If I’m not wrong, maybe [Magic Eden] can for the next two, three, four years, maybe. But I’m not so sure about the rest.”
Removing the fees from the platform has also already led to a significant increase in the prevalence of wash trading on the platform — the practice of trading assets between wallet addresses owned by the same person or party.
Lian explained this was being done to artificially increase an NFT’s trading volume to give the impression it is more highly sought-after than it actually is. This not only discredits the industry but deceives unwitting buyers into potentially paying inflated prices for NFTs.
The issue has become so prevalent on Magic Eden in the few days since fees were removed that OpenSea has since announced it is in the process of temporarily blocking Solana collections from the Top and Trending list on its homepage to avoid “gaming” those numbers.
Secondary monthly NFT sales in September were only US$550 million, an almost 90% decrease from its high in January 2022. NFT creators, marketplaces and collectors alike have had to make difficult choices about how to respond to the difficult market conditions.
Unfortunately, Lian does not see those conditions improving any time soon.
“There’s a lot of uncertainty. Based on the current charts, we should still be going down or going sideways for the next quarter or so,” he said.