Are DeGods the Future of NFT Royalties or a Publicity Stunt?
Plus, It's Long-lasting Impact on Teams, Creators & Beyond
DeGods are one of the most successful non-fungible token (NFT) projects in recent years and the number one Solana community as of October 2022. With a floor price of over 300 SOL ($10,000 USD) and the likes of Ice Cube and Solana’s cofounders, it’s grown to be a prestigious club that has set the meta for the rest of the industry.
Renowned for their controversial social experimentation, it wasn’t so surprising when the project tweeted an announcement over the weekend that it’s transitioning to a 0% Royalty structure.
Again as an experiment, it applies to all three projects from the group: DeGods, t00bs, and y00ts. What was once a 10% fee on secondary sales was updated to 0%, and as you can imagine, Twitter had mixed reactions on the move. Most of the crowd pointed out the risk in this move, with one thread in particular breaking it down into three sections: broken incentives, disruptive potential, and revenue streams.
Still, pseudonymous co-founders Frank and Finn DeGod must have a good reason for the move, with Degen Sweepers also among the no-royalty projects. So, what’s the deal?
Breaking Down DeGod’s NFT Royalties
Royalties are one of the fundamental revenue drivers for NFT projects. They typically list under 10,000 items for a $100-$200 mint cost, which limits you to $1 million to $2 million in seed capital to build something sustainable. However, a large chunk of that will go towards gas and other fees, like paying a 5% to 20% cut to marketplaces like Magic Eden or OpenSea to host it.
Even if you used an over-the-counter (OTC) marketplace like Yaww that doesn’t charge a fee, you’re still not walking away with much in the bank. However realistically, an NFT launch is only step one–the big selling point for big-name NFT projects like DeGods or Bored Ape Yacht Club is how to sustain the community while providing long-lasting value over the course of not months, but years.
This translates to onboarding a community manager, mods, potential attorney, accountant, marketing/PR firm, and other positions to keep things running smoothly. And even the high end of $2 million isn’t going to last long when you’re paying for this type of operation… and that’s why NFT royalties are so key to keeping revenue coming in.
But DeGods grew beyond one collection over the last year–it’s now an ecosystem involving Dust Labs (the company founded by the project co-founders) DeadGods, $DUST tokens ($32 million market cap), The DeDAO (Decentralized Autonomous Organization), and y00ts, which raised about $7 million in the first 24 hours of its launch.
When you want to compare this to eCommerce, Amazon has over 200 million customers paying $139/year for Prime, which will generate over $27.8 billion in revenue for the company this year alone.
Granted, that’s a small portion of its overall $500 billion it’ll make this year, but it’s not insignificant. And Amazon continuously raised the prices of its Prime membership since introducing its $79/year deal in 2005 while actively expanding the included features, so it obviously sees the benefit.
However, NFTs have something Amazon doesn’t have.
When a customer cancels Amazon Prime, their account simply ends. It doesn’t transfer to somebody else. But NFTs are different–if I want to leave DeGods, I would need to find a buyer for my NFT who will ultimately take my place in the club. This means the number of tokens in circulation never changes, and the revenue is less about a subscription model and more of an inverted customer acquisition cost (CAC).
As of writing this article on October 10, 2022, DeGods has a $97 million market cap with 1.3 million SOL in secondary sales on Magic Eden and 1 million SOL on OpenSea.That equates to over $72 million in fees paid back into the project over the last year, and it’s currently sitting at about $625,000 in weekly sales that would’ve brought in another $62k in revenue each week.
That is a significant amount of money that would equate to $3 million/year at that rate during what’s shaping up to be one of the worst recessions in recent history.
The average project can’t afford to lose that, and there’s more than revenue at stake in these royalties.
The Problem with 0% Royalties
NFTs have a unique situation in which losing a holder is intrinsically tied to acquiring a new one. Royalties can stop a rug pull by incentivizing the founding team to continue providing lasting value while removing them seemingly incentivizes token holders to sell. The benefit it provides is to those selling your token to leave the community, not those holding and remaining active.
However, it’s not necessarily accurate to call a token holder a “customer” because most of these NFT projects act less like a business and more like a community or club. People in your community are not customers. They’re closer to an Elks lodge or country club where the members are socializing or working together on common causes than selling to either consumers or businesses.
Even the Elks, Girl Scouts, and Little League charge annual dues, and I fear the race to zero royalties may cut out smaller projects. Essentially, providing zero royalties is likely to stop the next DeGods or Bored Apes from developing. It can be especially harmful to one-of-one creators and other smaller businesses and organizations.
DeGods has other revenue streams, like traits within the y00ts ecosystem and $DUST. They’re one of the top 10% of projects within the NFT ecosystem, but if you’re not among those elites, you’re lucky to make $2k to $20k per month, which doesn’t last long when you have salaries and other bills to pay.
But your average small NFT project doesn’t have multiple revenue streams, and royalties can be the only way for them to remain liquid. And for artists, royalties are one of the main selling points of NFT technology, making it a dangerous game to remove them.
With that being said, there is a path forward that will bring NFTs to the next level.
The Better Answer = Free NFTs
So, we know community is important because large enterprises like Amazon, Apple, and Microsoft are highly focused on building such communities. It lowers their CAC and improves a customer’s lifetime value. In fact, one of the things the NFT and DAO movements proved is that community building is the competitive advantage inherent in crypto. That leaves a question of how to reward and build a community if not offering 0% royalties, and that’s a simple answer.
Removing the initial mint cost is the way to lower the barrier, thus making NFT’s free. The mint price on the recent y00ts NFT launch was 375 $DUST, which is too much for the average person. Why pay over $700 to join an NFT club, when social clubs like the Elks lodge cost under $100?
And unlike 0% royalties, $0 mint fees have a proven model for success.
Take My BFF, for example.
The BFF friendship bracelets were initially given away during a January YouTube livestream involving Gwenyth Paltrow, Randi Zuckerberg, and Mila Kunis and have since sold 4822 ETH (over $6 million) worth of secondary sales, providing over $600,000 in residual funding to the team. Its follow-up You by BFF launch charged $100 worth of ETH for the mint (generating $1 million as all 10k were sold out), and the proceeding sales volume was less than half (2158 ETH) of the bracelets.
It illustrates that you can come out of nowhere airdropping a free NFT and still build a sustainable business. But it’s the mint fee that can be easily removed, not the downstream royalties. And there are NFT projects racing to zero-dollar NFTs, like Taiyo Robotics, which launched in November 2021 with a mint price of only 1 SOL.
Removing the mint fee lowers the barriers to bringing people into the project, rather than incentivizing those who sell their token and leave. This better aligns with the principals of the organizations behind the NFTs, as it helps them grow sustainable businesses out of their projects.
NFTs are about building a community more than selling art, and giving away free NFTs is likely to be the next big thing in the industry.
The zero-royalty structure proposed by DeGods simply doesn’t feel sustainable, and even major enterprises like Amazon with 100’s of revenue streams still understand the value of annual membership fees.
While some investors want NFTs to go the route of SaaS, I think it’s more likely we’ll see more disruption from no-cost NFTs that provide perpetual residuals.
That’s the race to zero I want to see.
Lena Grundhoefer is the Founder of ZEITG3IST, a globally-recognized strategy agency. As we provide future-proof marketing for the brands of tomorrow, we help Fortune 500 brands, as well as brands just starting out, break into web3.