Thread by @sainteclectic

One of the more recent features to hit NFTs has been revenue-sharing mechanisms.

“You mean I can be a collector of fine jpeg art that pays me money for holding it? Sign me up!”

Not so fast buddy, here's why. 🧵👇 #NFTs #SEC #Royalties #Ethereum #Solana #SolanaNFT

Before we start a big shout out to @Digitalxmisfits for his big brain collaboration on this topic, give him a follow.

Also to the @DegenDAOO and @ThugDAO. I am lucky to sit on their DAO councils which allows me to engage in some interesting discussions on NFT/DAO development.

In the last few weeks we’ve seen quite a few projects adopt this mechanism to attract buyers. On Eth @CyberKongz is one of the best known examples.

It is a collection of 1000 34x34 pixel apes with the 990 Genesis versions paying out 10 $BANANA tokens p/day to holders for 10 yrs

These BANANA tokens can be burnt to give your CyberKongz unique names, biographies and breed Baby CyberKongz. A BANANA is worth ~$300 meaning holders get $3,000 a day. It’s no wonder the Genesis Kong’s floor is 185Ξ or... $666k (Looks like bananas are the actual root of all evil)

If you’re wondering how BANANAs are worth anything, it’s because the community bought in as liquidity providers and created BANANA/ETH markets on @Uniswap – a dex with no KYC – making it difficult for the US to track and label as a security.

As a result Cyberkongz is one of the most popularly traded NFTs on Opensea with 7,560Ξ (US$27m) traded in the last 7 days.

On the Solana blockchain, holding a set of four Gen 1 @SolanaMBS's monkeys entitles you to marketplace revenue.

Given the MBS boom, I’ve heard anecdotally of weekly royalties being between 40-100◎ (~$914 to $2,286/day).

The Gen 1 set now sells for ~4,000◎, ~US$640k+!

New Solana NFTs in particular have adopted revenue models to attract members:
- @mmccsolana Meerkat Millionaires, 100% of secondary sales
- @danuki_dojo 100%
- @TurtlesNFT 70%
- @SolSnatchersNFT 50%
- @fancyfrenchnft 50%
-@PiggySolGang 30%
Credit: @meerkatintern

The new Solana projects share varying % of their royalty revenue from secondary sales with their token holders.

It’s still early so experimentation is key, but you can’t help and feel a little uneasy at these approaches and how sustainable they are. Why?

Well it seems that holders are receiving payouts / dividends from these models which raises the question of whether the NFTs could be deemed securities by the SEC.

Of course this is bad news because if they are, they are subject to the SEC’s regulation & Gary’s protection.

While there hasn’t been any SEC action on NFTs so far you can imagine that this is unlikely to remain the case as they become more popular & mainstream.

DeFi has already attracted SEC investigation and as a result the DeFi pulse index has lagged ETH in the last few months.

Auction sites (with heavily vested VC investors) may also take action to ringfence themselves.

Today we saw @Opensea (funded by VC @a16z) freeze @DAO_Turtles NFT for offering financial rewards (DeFi yield bonuses, staking bonuses, etc).

Uncertain times ahead, especially for best-selling projects with similar revenue share models like @mutantcats @cyberkongz and @ZombieToadz.

Under the Howey test if something looks, smells or sounds like a security then it is a security 🙈🙉🙊. Despite this, some view SEC intervention as so far out that it’s worth taking the risk

I mean half of crypto could be construed as securities. Gary & gang may never get to us

But upon reflection this represents short-term thinking to me. If you want your NFT project to be a long-term creator of value then it needs to have legitimacy now and in the future and this means protecting from regulatory risk.

Why compromise in the short term?

This will differ from project to project, e.g. newer projects can afford to take risks

But blue chips like @BoredApeYC, @DegenApeAcademy, @SolanaMBS & @thugbirdz can’t and shouldn’t IMO. Careful consideration is warranted now that they represent large communities & immense value

Indeed @BoredApeYC just announced that they engaged a legal team to help launch a legally compliant BAYC token.

Its implementation will likely be careful and provide utility potentially in their metaverse or games – rather than being a straight payment.

Given its place in pop culture and the potential of building a viral brand like Supreme this cautious approach makes sense for BAYC.

Since the announcement the mutant ape & kennel club floor was swept. A bullish stamp of approval of the thoughtful, considered approach.

I’ve come to conclude that it makes sense for projects vying for blue-chip status (DAA, MBS, Thugbirdz).

But to be sure, let’s do the math to understand what we’re missing out.

What would DAA/TBz holders get in revenue if they shared HALF their 4.2%/5% secondary sale royalties?

@DegenApeAcademy: @ 948,200◎ volume traded to date x 2.1% royalties / 10,000 NFTs = 2◎ per NFT or US$321 over 2 months.

@Thugbirdz: 107,800◎ volume x 2.5% royalties / 3,333 NFTs = 0.81◎ per NFT or $129 over 2 months.

Not as much in royalties as you thought it’d be, hey?

Is US$64 to $159 a month (or $776 to $1,911 a year) worth the potential regulatory consequences?

Is it worth jeopardizing a project's legitimacy in the long run?

Now this analysis may be different for projects that have less cultural brand buy-in at present or projects that have a higher royalty, e.g. Meerkats share 100% of their royalty with holders.

But I wonder how sustainable that is.

Don't get me wrong, I've warmed to the art and I do want to see it succeed.

But there will be a point where market participants refuse to pay $X to access $Y royalties. Volumes drop, then the whole thing unwinds in a vicious cycle like a margined long position in a sudden dump.

Also since 100% of royalties go to holders the team is not incentivized to build – unless they minted / hold a large # of Meerkats themselves.

I'm not saying that they did, but if that is the case then how comfortable do you feel that the team did this without disclosing it?

These projects certainly do feel like they have some turbo-ponzinomics built into them (frenzied capital buys the token, driving high royalty payouts until it can't sustain itself) - but I guess if you keep the definition loiose enough then anything could be classified as a ponzi

To conclude, this revenue share concept is a great social experiment. It could work out and may never be investigated by regulators.

It could be a ticking time bomb.

I certainly don't claim to know how things will turn out but wanted to share my thoughts to encourage discourse.

I've heard some NFT holders argue that the whole securities question shouldn’t matter as long as the team and holders aren’t in the US. But this ignores the huge size and cultural significance of the US market for an NFT project.

For me?

My preference is to invest in projects that focus on the long-term, having the best chance to ride out cycles and establishing legitimacy through community building and member value-add in other ways.

This is the way.

@aeyakovenko @rajgokal @c0inmatrix @realcryptotem @munkionpluto @blocmatesdotcom @mcmanager @mdudas @kartoffel @thugbirdz @pablocorrea @blokculture @gmoneyNFT @BoardApes @jmt_nft @kidfromcruces
@jakeudell @TheDeadstockOG @boredgentleman @CapetainTrippy

@jemmmyjemm @0xCelon @MilstGuga @CryptoMagellan @0x1dad @vladtoni @0x_thug @CamTuff_ @degen7777 @SollyTheSolApe @solboyz @degen_inc @DegenArmstrong @SolanaLegend
@derellnft @C0inMatrix @GlingGoong @thesolmane @consciousvalue @cited @kevinwuzy @RasmusGroenning

Mike Dudas’ take:

Quick update to this topic:
help.ftx.us/hc/en-us/artic…

Yes I am aware @FTX_Official is a CEX, but it is one that has been excellent in product, marketing and providing a "safer" platform for people to dip toes into crypto.