LIP-3: Set royalties on Open Sea to help Community Marketplaces

In LIP-0, Dom mentioned that rather than having royalties on Open Sea (which must be managed with a central key), it would be better to direct people towards community marketplaces:

Creating a Loot-specific marketplace allows collection of royalties, likely provides a better experience, allows for more optionality around L2 and other chains, and is a lower “all-in” fee since the marketplace fee is equal to the royalty, rather than being added on top of it

This was the inspiration for creating Loot Exchange, a marketplace with an “all-in” fee of 1% that goes back to the community.

Originally, our plan was to collect 2.5%, in line with a previous community poll on royalties. However, we felt that we needed to start with a lower number, in order to attract sellers from Open Sea. Unless fees are lower overall, most sellers will just continue selling on Open Sea, where network effects are stronger. After all, sellers are more likely to be motivated by price and liquidity than a sense of community (arguably the same will be true for buyers too). In effect, the fee on Open Sea sets a ceiling on what a community marketplace can collect.

Perhaps this is OK. Maybe a low fee is the right solution. But it also feels like a lost opportunity to reallocate resources from speculation to building.

Alternatively, if Open Sea had a royalty, it would be a double win for the community. Community marketplaces could collect more, while still having the lowest fees, and additional funds would be raised through Open Sea sales.

There seems like a few options:

  1. Continue with no royalty on Open Sea. Avoids complexity, but will likely limit adoption of community marketplaces, and stunt the overall amount of royalties that can be collected
  2. Set a royalty before burning the keys. Won’t be able to change it, but if it’s a conservative amount, could be a nice middle ground
  3. Keep the keys, with social consensus that their only power is setting royalties

Of course, this raises the question of where Open Sea royalties should go. A strong candidate is to the same treasury contract that is used to collect fees from Loot Exchange. This is a fork of the NounsDAO contract, which implements Compound-style on-chain voting using Loot balances. What’s cool is that this contract does not attempt to be “the DAO”. It’s just “a DAO”, which at this point in time has the sole purpose of collecting and allocating marketplace royalties on behalf of the community.

By decoupling the keys that set royalties from the DAO that spends them, and by limiting the scope of that DAO, you avoid many of the issues outlined in LIP-0.

Of course, as the creators of Loot Exchange, we have a horse in this race. But mostly because we want to see more cool stuff get built, and think royalties can be a powerful lever. This issue wasn’t immediately obvious to us, so it seemed worth bringing attention to. It feels like something that should at least be considered before pulling the trigger on burning the keys.

  • No Open Sea royalty, and burn the keys
  • Yes Open Sea royalty, then burn the keys
  • Yes Open Sea royalty, and keep keys purely for adjusting royalty

0 voters

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Thank for you making this proposal! It’s been really cool to see things mature. :slight_smile: There are only a few issues that I wanted to raise for discussion:

  1. There was an overwhelming vote in favor of burning the keys, both in quorum and split (89% in favor). In most cases the keys would have been burned already. The only reason they’re not burned yet is because there was another prereq (the owner bags) “blocking” the burn. I worry that going back on a previous vote might be harmful to the integrity of the process. At the same time, being pragmatic is what sets us apart from machines. I think it’s true that there are ways to be more nuanced about this but am not even sure how this would be approached. @Hierux, do you have any thoughts here?

  2. Removing OpenSea as a viable option forces the community to “compete” with it, which I think might ultimately make for a better ecosystem. Loot Exchange already competes on percentage (1% instead of at least 3.5% from OpenSea) and UX, and there’s still a lot more that can be done. As the ecosystem continues to grow into L2s, sidechains, etc. it becomes really useful if there is a colloquial marketplace that can adapt with it sooner rather than later. OpenSea itself started as Cryptokitties marketplace.

  3. Specifically on the point of keeping the keys “for royalties only” (option 1), my understanding is that royalties are set at the backend (e.g. centralized) level on OpenSea, not through the contract. So any royalty changes would need to be made by a trusted individual: possibly directed by a multisig, but still ultimately executed through an individual, not an automated DAO. And because the key would need to be kept alive for this, there is nothing preventing the individual(s) from making other changes that the keys allow — including transferring ownership of the contract, changing metadata on OpenSea, or changing the royalty amounts or recipients themselves. I haven’t dug all the way on this so please let me know if I’m wrong!

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Thanks. All fair points. There does seem like pretty strong arguments for burning the keys, so maybe this mostly boils down to whether or not to set a royalty before burning them.

The main argument is that if community marketplaces are collecting royalties, but OpenSea is not, then the community marketplaces are at a disadvantage. They have to keep royalties low to compete, and there’s a ceiling on the maximum royalties that can be collected.

Most trading volume is speculators, not community members. They will trade where there is liquidity, and a 1.5% fee difference is probably not enough to shift their behavior. You could have an amazing marketplace that everyone in community loved and used, and still do a fraction of the volume. Case in point: Loot Exchange has had 1 bag listed and 0 bags bought so far. It’s early days still, but shows what an uphill battle it will be!

My takeaway is that it will be difficult to collect a meaningful amount of royalties without collecting on Open Sea too. So it really comes down to how important the community thinks royalties are. If not important, then probably should just have no royalties across the board. Drop the fee on Loot Exchange to 0 and focus on UX. If it is important, need to take bold action to make it happen.

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It’s not appropriate to have the ‘keep keys’ option here imo, considering the previous vote that had overwhelming support to burn the keys.

This poll should strike that option and only inquire about Y/N for Opensea royalty.

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Please add Opensea royalty

I support opensea royalty for the reasons described in the OP.

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Maybe LIP-3 (set a royalty or not) can live alongside LIP-2. They’re not dependent on one another beyond needing to happen before the burn so the votes could be parallelized.

Agreed. If this moves to a snapshot vote, it should probably just be a vote on whether to set a royalty before burning keys.

It seems like a good fit for Snapshot’s Ranked Choice Voting feature. That way you can get yes/no on royalty and figure out the right amount in a single vote.

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I like this idea, agree RCV with different royalty sizes would be a good format if it goes to Snapshot.

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My vote would be to not set a royalty on OpenSea and burn the keys.

I agree that passing up on an OpenSea royalty is a hard pill to swallow atm, as adding it would create a wonderful inflow of funds to go directly to the community of builders.

However, I somewhat disagree with the statement that, by funnelling those funds to the Loot Exchange treasury, we would be funnelling them to “a DAO” and not “the DAO”. For all intents and purposes, this action would make it “the DAO”. By setting this royalty on OpenSea and sending it to the Loot Exchange treasury, this treasury naturally becomes Loot’s “official” treasury. And with it, the potential problems that Dom mentions in LIP-0.

One could argue that this decision of setting the OpenSea royalty is an action relatively abstracted away from end-users and thus any sort of “official DAO” perception won’t end up materializing. This is possible, but I would say there is a bigger possible threat here…

In taking this action, the incentives to build better, more creative marketplaces (as well as other forms of value and monetization) falls dramatically. Without it, we face the difficult yet worthy challenge of building better experiences that move the volume off OS. This creates the potential for other marketplaces (Loot Exchange etc) to compete for that volume, and thus opens us to many possible paths of innovation. By installing this central royalty in the relatively closed-off UI of Opensea, those possibilities shrink down to one. Competing with Opensea would become quite ambiguous to support, as it would mean competing against royalties already flowing to the Loot community. And competing with Loot Exchange might shift from healthy marketplace activity to something quite divisive.

An example scenario: perhaps something akin to Lootmart becomes a standard, and games/interactive experience arise that give meaning to the use of individual items. Marketplaces could be built for the buying/selling/trading of individual items, such that these marketplace feel soaked in the narrative and world of Loot. These marketplaces could take a fee. Now, assume all this in the context of having activated a royalty on OpenSea. There would be inertia against these explorations. The staking/unbundling of Bags may also be unwanted, for it would pull away from volume on Opensea.

I also believe that, while royalties can offer a great route to funding, there are many other models to explore to move capital into the Loot building community (crowdfunding, NFT sales, lootverse events, etc).

In my view, efforts should be on creating more value through creativity and competition on layers above Loot and its og contract. Rather than capturing value where we see it most easily today, which may very well end up stifling innovation.

By setting up this fee, we essentially align our incentives with speculative activity. I believe in our ability to successfully align incentives with creativity.

Appreciate any thoughts, feedback, rebuttals to this! Thanks.

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@Peter_Watts @Hierux

Since it’s been 3 days and there is over 25% forum poll in favor, I think it’s fair to incorporate feedback and move forward with moving this into Snapshot as LIP-3?

I believe this and LIP-2 would be the last blockers before burning.

@matthewchaim I think your points make a lot of sense as well. :slight_smile:

Thanks @matthewchaim, very well articulated.

Ironically, the motivation for this proposal was not actually about maximizing the royalties that can be collected from Open Sea. It was the opposite. It was about leveling the playing field, so that community marketplaces could thrive, and eventually drive the bulk of royalties. There are plenty of incentives to create community marketplaces, especially around UX innovation. But what can stifle that innovation is needing to compete against a 800-pound gorilla with one hand tied behind your back.

My main point is that if the community is serious about collecting royalties, it needs to collect them across the board. It’s unreasonable to expect community marketplaces to take over significant volume any time soon. And even if they did, the amount of royalties raised would be small, given the need to undercut OS (because speculators only care about fees, not UX and narrative).

I just want to make sure that expectations are set correctly. A vote for no royalties on OS is effectively a vote for no royalties at all. Which, by the way, is a very reasonable position for all the reasons you and Dom outlined!

@dom sounds good. can create a clean proposal with pros/cons and circulate a draft

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I don’t think we should do this (especially since the keys are about to be burned) but am taking your point to an extreme and imagining a scenario where the OpenSea royalty is 90%. :sweat_smile:

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Ha, yes 90% is a little extreme…but it does demonstrate the point. The higher the Open Sea fee is, the more likely it forces speculators to change their behavior and seek out community marketplaces as alternatives. It also collects some royalties in the meantime, but that’s just a bonus.

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Should the proposal specify a destination for the royalties (multi-sig or compound-style treasury), or leave it open for a separate vote?

OK, I’ve put together a draft which anyone can comment on here:

On further thought, multi-sig does not really make sense for this, given that it can’t be changed later. Needs to go straight to on-chain. @dom are you planning to setup a different nouns-style treasury using the multi-sig, or should we use the one setup for Loot Exchange? Btw, can easily change the URL to make it more neutral.

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If you’re asking about the owner bags (assuming that passes) I think it’d be better to use a different treasury. It’s a good way to kick off the idea of “a DAO”, not “the DAO”, and it also allows some flexibility around quorum, etc. requirements that might work well for the bags but not as well for a perpetual ETH treasury. Would love to fork what’s already there, though.

For this proposal, I think neutralizing the URL or just using what you prefer makes sense. It’s your proposal!

Agreed. Thanks for moving this forward.

Great! I think we should be explicit in the proposal that the destination for the royalties already exists (as the compound-style treasury referenced here and add any disclaimers necessary (e.g., launched by the Loot Exchange team but not controlled by the team, etc). This should help reduce any ambiguity/confusion when voting.

This would also be a non-binary snapshot vote. How are we proposing to tally the results?

Snapshot has an option of Ranked Choice Voting, which I think should handle the tallying quite nicely.

Sounds good. Ranked choice deviates from the framework in LIP-1, but there are benefits here to staying flexible and moving otherwise strong proposals through the process.

@Peter_Watts let’s move this forward to snapshot. Can you please drop the contents of your proposal draft into a comment here (which I will lock for posterity). Also, if you could include a copy of your proposal, or a direct link back to the comment, in the snapshot itself that would be best.

In the meantime, I will rename the post title to include “LIP-2” (cc: @dom, tagging you here because I think there was some uncertainty around which would be LIP-2/3 between the royalties/remaining bags proposals). I’ll also edit the initial post in this thread to include a direct link to the snapshot vote when that is ready.

Thanks all.

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