The Sunday Drip #1 | Fees are the necessary evil in the NFT world
We hate the high gas fees. We don't love the OpenSea fees. We get the Creator Royalty fees. The fees are too damn high. But honestly, we need them to survive.
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If you have purchased an NFT before or even talked about buying an NFT before, there is no doubt in my mind someone has told you, “why don’t I create my own NFT, sell it to myself for $100k, and sell it to someone else half-off for $50k.” This makes me want to die when I hear this. But without explaining that resale faking, along with counterfeiting, is an also issue in several industries (Insert Sour Grapes reference). Let me explain why we need NFT fees in our lives, and why we might want to hold off on eliminating gas or transaction fees…
Gas is too damn high. But it’s not all bad.
Let me start this argument not on OpenSea, and not on Ethereum, but with Solana. Solana (for argument sake) is basically Ethereum with little to no gas fees on transactions. If you’ve bought both a Solana NFT and an Ethereum NFT, you know the difference is the obscenely high Ethereum gas price. A Solana transaction might cost $5 to execute, but Ethereum transactions (recently) have cost around ~$300 to execute.
It’s almost too easy, and too inexpensive to trade Solana NFTs. You don’t think twice about the cost of the transaction. It’s easy to get in and out of projects and not lose much to gas. If there is volume in a project, people are willing to take a chance on buying a couple and closely tracking the sales to see if they can make a quick, narrow profit. Minting a project isn’t a concern if the mint price is low. Bored Ape Yacht Club’s mint price was lower than Ethereum gas is right now. Finally, Solana projects can airdrop all they want. Okay. Am I really arguing for high gas? What’s my point?
High gas costs force buyers and projects to transact more carefully.
The literal cost of doing business with Ethereum NFTs leads to buyers and projects making more thoughtful decisions. Buyers, especially with newer or low cost NFT projects, are less likely to buy into projects with the sole intent of flipping the items. High transaction costs lead to less transactions and more hodling. Projects that promise airdrop companions to their communities as a “benefit” need to consider the full airdrop gas expense. I’ve seen too many “free plus gas” companions go unclaimed. Less airdrops is more in my opinion. I don’t love when projects get airdrop happy. An airdrop for 10k pieces could cost $3M right now. Gas gives the airdrops value.
Is this a fair argument to make? At the end of the day I think gas impacts flippers the most and helps protect small projects, and I’m all for that.
What about the OpenSea/Marketplace fees? How are those good?
OpenSea charges 2.5% on every transaction on their site. But some sites, like the Solana marketplaces or even the Not Larva Labs CryptoPhunks (don’t get me started) are royalty free. And that’s a problem.
You remember the example I gave above? You can basically do that when marketplaces are royalty free. There is no financial disincentive to selling an NFT to yourself to make it appear to have a sales history and a high price. That is what scared me away from some of the Solana projects. The 2.5% fee that OpenSea charges is just enough to scare (most) people away from artificially inflating the price of their own pieces. The percentage cost applies equally to all projects, so some of the CryptoPunk and BAYC sales can be paying thousands of dollars in fees to OpenSea. And that’s good.
The OpenSea percent fee discourages inflating the expensive projects.
And maybe it will help OpenSea stay
And what about the creator royalty fees (2.5%-10% normally)?
Yes. We should all support those. End of story.
Okay I’ll expand. Creator fees on every transaction is the beauty of NFT smart contracts. They encourage buyers to buy projects they intend on holding, and of course, the fees financially support the creators of projects. Creators don’t need to worry about marketplaces or scalpers buying their pieces low and selling them high. Everyone should support these.
Some of the less creative/higher utility projects use their royalty fees to pay their Discord moderators, fund marketing/contests, and generally keep the lights on. There are so many reasons these are good and keep the NFT economy running.
These fees are actually similar to dues for real world clubs that have high upfront entrance fees (Think Disney Vacation Club or a Tennis/Golf Club). I have more thoughts on this for another time…
In the most backwards way, transaction fees create trust in the system.
I know at the beginning of this article, I said I hate the uneducated argument we hear over and over abut selling to yourself to set a market value. However, NFT projects move so quickly that it’s hard not to think there is some crypto whale on the other side pulling the strings to manipulate the markets. And while I do think that still happens, the gas and transaction fees paid to the Ethereum network, OpenSea, and project creators are significant enough that they deter this behavior and as a result, create a trust in the system and a belief that buyers are genuinely transacting.
If you aren’t convinced, can you imagine transacting on a gas-free, fee-free, royalty-free marketplace. Do you really trust the price and sales history of the NFT you are buying? Fees really are the necessary evil in the NFT world.
Thoughts? Comments? Let me know! I am always open to feedback. Share this!