Gossip about Gossip: How Platforms Provide Content Creators with Cryptocurrency Payment

Oh welcome to gossip about gossip. Powered by Hedera Hashgraph. And each episode, we'll cut through the hype of blockchain promises and explore real world examples of organizations creating the next generation of decentralized applications, which will bring trust back to the internet for us all. Hello everyone, and welcome to the latest episode of gossip about gossip, the podcast where we talk about real world applications and implications of distributed ledger technology. My name is zenobia, Gods Chuck and I am the SVP of communications here at swirl labs, helping to grow the Hedera ecosystem. I am joined by gr��gory Schneider, who is the new deputy general counsel at Hedera. Hi, Gregory, how are you? Hi, Zenobia. I'm good. Great to be here. Thank you for having me. Absolutely so you are new to the Hedera world, but I understand have been a longtime fan and participant in the Web3 economy. So for our listeners, can you share with us a little bit about your background and your journey to hedera? Yeah, absolutely. So I am a lawyer. So I got my training for the most part, doing business trials for the first part of my career and then kind of got disillusioned with very long, 80 to 100 hour workweeks doing that stuff and said it's time to try something different. And I went in-house to a credit Union in Arizona where I live and got to try a flavor of that. And while I was there and had a little bit more free time, I started thinking, OK, what's the future of money? Where where is this industry going? You know, where are we headed? And of course, if you Google the future of money, crypto comes up naturally. And so I went down this crypto rabbit hole and just really never looked back. And a big part of that journey was learning about NFTs and starting to collect some NFTs and really enjoying connecting with artists directly through that process. And it's just really fun the way that this ecosystem is fundamentally different than the very centralized Web2 platform based system. Well, and I think the sort of financial system is what brings a lot of people into this space. But then they learn, wait a minute, the areas that I'm passionate about and really interested in outside of finance are also being affected by this. And new business models are being developed. And how do we think about those in thoughtful ways where I think we've learned some hard lessons in Web2 in terms of content creation and who actually gets to benefit from that content creation. Absolutely and and like you say, I got into it looking at the money side of it. And then but the main side is just kind of like the first layer of what happens on anything, that ability to transact and then you start layering on top of that. Well, transactions for what? And when you have people who are making art or music or any kind of creative or writing, for example, any kind of creative endeavor, then you have to figure out how are those people going to get paid and how are they going to get paid using this new technology? Yeah and I think we talk about on existing social media, oh, it's great. You don't have to pay for it, but you pay for it through advertising. So you become the product, right? You're generating all this content. You know, I think the Stephen King, Elon Musk back and forth is quite amusing right now in terms of saying, wait a minute, you're going to charge me to create content that makes your platform incredibly valuable? Something doesn't seem right there. Yeah, Yeah. And it's I mean, it's fun to watch on Twitter, this push to have Twitter be very more decentralized than it is. And I think even Jack Dorsey has said I didn't originally want Twitter to be this big centralized thing. I wanted it to be a protocol like email where anybody could hop on and use it from any entry point. And I think that brings us to our sort of the current debate and our topic today, which is there is a lot of debate in terms of NFTs and royalties and how creators can and should be compensated for their creations and how much control they actually have over that. Right so and as we alluded to a moment ago, you know, one of the big things that Drew a lot of creators to Web3 over the last 12 to 18 months was this notion that I can make something through an NFT and then through that process, I can set a Royalty that's associated with it. So any time it changes hands, I'll get a small cut of whatever that sale is. And that cuts out like a lot of Web3 is meant to do. It cuts out the intermediary of a publishing house or music label or an art dealer or something along those lines. And so this was hugely promising that you one, you can do direct sales to the people who are collecting your work through these very easy to use marketplaces. And then to you can set up what you think is a fair Royalty for your work and collect that straight away. And that was huge. Really enticing to many creators. Yeah and I think that is sort of an ideal utopian model. But what is actually playing out today, what seems to be happening as we see some of these marketplaces evolving their business models? Right so when you look at the largest NFT marketplaces like OpenSea or LooksRare or places like that, what you had for a long time was this system where it would look at the metadata in NFTs that were minted on Ethereum or polygon or Solana and say, OK, what did the creator of this NFT ask that the Royalty would be? And then the marketplaces would say, OK, we will honor that request for this particular Royalty. So anything that's traded on our platform will have to honor that Royalty. But then more marketplaces popped up and. The result was that these new marketplaces said, well, we have to find a way to be competitive and how can we be competitive? And we can be competitive by reducing the cost to people who are using our platform and Web3. Transaction costs are already historically low by most standards, so then the one place that they could really look to truly reduce costs was to say, OK, well, these NFTs on Ethereum and polygon and Solana are not actually, there's nothing that requires us to actually enforce this request from the creator about the Royalty. So all we have to do is say, OK, we'll make it optional. We'll still give people the option to pay this fee, but we won't force them to. And so. They did. And there was. And then they would announce that they did. And then there would be significant controversy just around the fact that they weren't going to enforce the fact that the creator had requested these royalties be paid. And then what was interesting to watch was, well, what do people actually do when they're trading nfts? And it turns out that 80% or 90% of people choose not to pay the Royalty if they don't have to when they're buying NFTs on these marketplaces. So we went from basically 100% of the market honoring this creator request to maybe 10% or 15% of the market honoring it. And it really leaves creators kind of at the whims of these marketplaces to see. Well, I thought I thought I was going to get, whatever, 2%, 5%, whatever they said on every sale. And it turns out they're getting 2% to 5% on 10% of the sales. Right and it seems like that's a bit of a unseemly bait and switch. Right if you as a centralized marketplace are trying to say, no, no, that's not us, we're giving people the option to choose whether they actually pay those royalties. And look at those individuals. It's their fault. Right but at the end of the day, really, it is those marketplaces saying, gosh, I have an opportunity to put this on the shoulders of my users, but really take away from the creators and they have no way to enforce those royalties. So what's the solution to this? How do we get away from this? How how do creators really say, yes, I know that when I make a decision to build this, to be part of this ecosystem, that there is no way that they can, just with a swipe of a pen, change their policies down the road. There are a couple of things that people have been talking about as this debate has been going on. And so one is develop social consensus, some mechanism for social pressure to force essentially force people into paying these royalties because it would be shameful not to. And that's putting it on the shoulders of the individuals. Right exactly. Exactly so it's not an ideal solution. And everything about Web3 is how do we automate and how do we build it into the code so that we're not relying on trust and social consensus for a lot of things? And another thing I've heard creators talk about is like, well, I'll make my own walled garden experience so you can only by trade, sell my NFTs in my little ecosystem, which again is not ideal, because then you miss out on this bigger marketplace of NFTs and the trading and the collectors that are drawn to a large marketplace or. And the reason we're having this podcast today is we have a solution already built in on hedera, where unlike other chains like Ethereum or polygon or Solana NFTs that are minted on hedera, the creators get to set the Royalty when they make that NFT, and then the network itself actually enforces that Royalty in a couple of different ways. So if there's a sale of the NFT, then the network will say, OK, what percentage of the sale to the creator set for that? And then the network will collect that amount and send it to the creator. And if. But if there's. Because many times somebody who's owning an NFT will want to transfer it to a more secure wallet or they're rearranging their own house, their own collection, that sort of thing. They might want to move it. And then there is something called a fallback fee. So if you're doing that, there's still the creator can set a fixed fee that says, OK, if it's not sold, I'm still going to charge the recipient of the NFT some fixed amount for just moving it into a different wallet. And those can be different amounts. Assuming, assuming the latter would probably be a small amount. It could be set at a penny or something so that they still enable that. But it's again, the creator's choice, right? Exactly and but the interesting thing about the fallback fees, too, as I was thinking about this, is it is kind of a. On chain social pressure, right. Because if you're transferring it your NFT your and there's even a penny fee for doing it to a new wallet, you're essentially alerting the creator of that NFT. Hey, this NFT changed hands and here's the fee associated with that changing hands or changing wallets. And since everything's visible on chain, if you take a look and say, OK, well, which wallet did it move from and which one did it move to? And it's associated with someone who wasn't the original owner. And you haven't paid the Royalty fee or it looks like there's something different going on. Then it alerts the creator to, hey, what's happening here? What why was there some sale that happened that apparently was not on chain? And perhaps perhaps that's a charitable donation or something like that where they sure get more visibility into how are their NFTs being used and shared and and what is that the value of those? Right, right. But for most people who just are interested in buying and selling these and honoring creators wishes and through people want legitimacy. And so by having this done at the network level where it's just done automatically and it doesn't matter which marketplace you use, it doesn't matter which wallet you use, then it just sets the default to be honoring what the creator wanted. And I think that's way better for creators, and it aligns their incentives to keep creating work and making their work more valuable because they're going to see a piece of that value increase. Yeah you know, it's interesting. Over the years, Liman and Mance have talked a lot about governance and how, you know, unless you think about some of these kinds of things, there is sort of a reversion to the mean or a reversion to sort of the simplest thing or what is previously known or what is easiest and what is cheapest. And so it seems like that is happening in the market, right? Without some built in mechanisms for enforcing Royalty fees. You know, the honor system is one system. But it, I think, has proven that it is probably not the ideal system. If you want to make sure that artists are getting recognized and that their wishes are being upheld. Right it is. And in a lot of the debates that I've listened to about this, you know, everybody kind of acknowledges, well, it'd be ideal if it was enforceable, you know, as a matter of code, but it's not. So now we have to come up with all of these elaborate solutions to a problem. But on the Hedera network, it is enforceable as a matter of code, which makes the governance easier to aligns the incentives properly from the outset. So you don't have these downstream problems where. OK, well. If we don't have to do that, we won't. Right and I will do a shameless plug here. I think that's probably part of the reason why, even though the overall NFT ecosystem for all NFTs is down in value, we are seeing some tremendous growth in terms of the Hedera and FTX ecosystem, both a number of creators that are putting their collections on Hedera as well as the transaction volume and the engagement. So Gregory, Thank you for spending some time with us today for sharing these thoughts. I think it's really important that the community understand and be able to spread the word here. Any last words before we wrap up? No, just Thanks so much for having me and letting me talk about one of my favorite subjects. Like you say, NFTs are, I think, one of the most fun things about web3, and it's really fun to watch the ecosystem bloom on Hedera. Absolutely Thank you so much, Gregory. Have a good one. Thanks you too.