NFT royalties: what they are and how they work

by James · May 26, 2023

NFT royalty refers to a commission or percentage of revenue that a non-fungible token (NFT) creator earns every time their NFT artwork is sold in a secondary market. This allows content creators to earn and maintain a passive income from the first sale of their original work.

A content creator will always receive 100% of the price of their work during the first sale. During the minting and listing process, the creator states how much royalty they will receive for secondary sales – it usually ranges from 5-10%. If an NFT is sold for $10,000, the current owner will receive $9,000, while the original creator will receive $1,000 directly paid to their wallet address.

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How do NFT royalties work?

Royalties apply to almost all NFTs in existence — artwork, profile pictures (PFPs), tokenized music albums, photos, avatars, etc.; the same mechanism applies: royalties are encoded into the smart contract of a blockchain platform, and for each secondary sale, the smart contract enforces the terms and conditions necessary for royalties to take place.

The contract then reserves a percentage which is later delivered to the original creator, as mentioned above, and the currency is usually the one supported by the platform – for example, OpenSea pays out royalties in ETH as it supports Ethereum and Polygon – an Ethereum scaling solution. Each NFT marketplace will have its own set of NFT smart contracts to manage NFT royalties.

Royalties do not vary with market movements – the selling price of NFT varies over time due to several factors (market demand, scarcity, utility…) and therefore causes variations in the amount of profit creators receive.

Also Read: Who Invented NFTs? A brief history of non-fungible tokens

NFT Royalties: A Topic of Controversy & Debate

Royalties have been the subject of many disputes in NFT and the crypto community at large. Some people dislike NFT royalties because it means paying a cut to the original creator, and this can drive away potential buyers.

On the other hand, others believe that NFT royalties have become a key feature of the NFT ecosystem as they offer a sustainable source of income to creators, whether they are artists, musicians, project developers, businesses, etc.

Furthermore, NFT royalties also promote competition as the royalty system greatly rewards originality – the more valuable, useful or unique something is, the more likely buyers will pay royalties to original creators.

NFT royalties, while a simple concept at first glance, have become a problematic topic for the NFT community. The key parties – content creators, traders and marketplaces – have long debated and disagreed on how to properly define an NFT royalty system. This has led to serious frustration in society. Some NFT marketplaces like X2Y2 decided to replace the traditional royalty system with enforced optional royalties.

Overall, NFT royalties provide creators with a continuous revenue stream and control over their art, while benefiting collectors, speculators and platforms in the NFT ecosystem.

Types of NFT Royalties

As we previously mentioned, not all NFT marketplaces use the same model when it comes to defining and executing NFT royalties. Some platforms will offer optional creator revenue, which essentially allows NFT owners to decide whether or not to pay a percentage of their sales to creators.

The NFT platform LooksRare uses optional royalties, which allow users to pay royalties at checkout. However, the platform distributes 25% of platform fees to creators and collection owners.

Other types of NFT royalties are more aimed at musicians. For example, Ditto Music allows users to acquire shares of songs from their favorite bands and get paid monthly royalties via Bluebox, the company’s blockchain platform.

Advantages of NFT royalties

There are several benefits to NFT royalties, including:

NFT royalties provide artists with a continuous stream of income, recognition of their original work and ensure their compensation.

Fair distribution of value within the NFT ecosystem, with creators, collectors, speculators and platforms all profiting from NFT trades in varying amounts

NFT royalties are coded into the smart contract on the blockchain, ensuring that the terms of the NFT are met, and if a royalty is specified, a portion of the profits go to the artist who created them.

Link royalties to market demand that rewards and values originality, encourages creators to produce high-quality content, and benefits from the resale of unique, limited-edition works

Popular NFT marketplaces with royalties

Some of the most popular platforms with the best royalties are:

OpenSea: the industry’s largest NFT marketplace measured by volume. It offers optional royalties with a minimum of 0.5% for the creator. This was implemented in 2022 as part of an ongoing debate on NFT taxes

LooksRare: second largest NFT marketplace. It offers optional royalties, giving creators 25% of trading fees.

Nifty Gateway: Nifty offers enforced royalties. This means the platform takes 5% of every NFT sale plus 30 cents to cover fees associated with credit card processing.

Rarible: similar to Nifty Gateway, Rarible offers forced royalties where the marketplace takes 2% in total from both the buyer and the seller.

SuperRare: enforced royalties too; It takes 15% of the first sale. Each secondary sale awards 90% to the collector, while the original creator receives 10% in royalties.

Criticism and Controversy of NFT Royalties

Like any branch of the cryptosphere, NFT royalties have been the main cause of conflict and debate within the NFT industry. Here are some of the main concerns and criticisms surrounding NFT royalties:

Market Manipulation: Some individuals may try to artificially increase the price of an NFT by using any tools at their disposal to receive higher royalty payments.
Fairness concerns: we’ve talked about optional royalties in the past, and it’s raised concerns because of uncertainty about long-term sustainability and fairness for artists and content creators.
Ethical dilemma: this point is connected to some of the previous points regarding controversies and disadvantages. The idea here is that by removing, reducing or manipulating the NFT royalty system defeats the purpose of Web3 and goes against the standards of fair, decentralized societies.

Final Thoughts: The Future of NFT Royalties

In conclusion, NFT royalties offer a fair and transparent way for creators to earn ongoing income from their original work and incentivize them to produce high-quality content. Royalties also help distribute value more fairly within the NFT ecosystem and benefit collectors, creators, speculators and platforms differently.

Featured image via Pexels.