NFTs have taken the world by storm, with millions of dollars being spent on unique digital assets. These unique digital assets are used to represent ownership of various types of creative works, including music, videos, and artwork. NFT royalties are a newer development within the NFT ecosystem, allowing creators to earn ongoing revenue from their works, even after they have sold them to someone else.
One important aspect of NFTs is the ability for creators to earn royalties on secondary sales. In this blog post, we will explore the NFT royalties in depth.
What are NFT royalties?
NFT royalties are a percentage of the sale price that the original creator receives each time the NFT is sold. For example, if an artist sells an NFT for $1,000 and their royalty percentage is 10%, they will receive $100 every time the NFT is sold in the future.
NFT royalties are a way for creators to earn ongoing revenue from their work, even after they have sold the original NFT. This is important because in traditional art markets, artists only earn revenue from the initial sale and do not benefit from any future resales.
The Need for NFT Royalties
One of the biggest issues that artists and creators face in the traditional art market is the inability to earn royalties on secondary sales. Once a work of art is sold, the artist no longer earns any money from future sales, even if the piece becomes incredibly valuable. NFTs have changed this by allowing creators to receive a percentage of the sale price every time their work is sold, ensuring that they are fairly compensated for their work.
How Do NFT Royalties Work? Step-by-Step Work Flow
Step 1: Creation of NFTs
The first step in implementing NFT royalties is to create an NFT. NFTs are created by minting them on a blockchain, such as Ethereum or Binance Smart Chain. When an NFT is minted, it is assigned a unique identifier and recorded on the blockchain.
Step 2: Creation of Smart Contracts
Once an NFT is created, a smart contract can be written and attached to it. Smart contracts are self-executing contracts that are stored on the blockchain. They can automatically execute when certain conditions are met, such as a sale of the NFT on a secondary market. The smart contract can include instructions for the transfer of ownership, as well as the royalty percentage that the creator will receive on secondary sales.
Step 3: Setting the Royalty Percentage
The royalty percentage is the percentage of the sale price that the creator will receive on secondary sales of the NFT. This percentage is typically set at the time the NFT is created and can range from 5% to 15%. The royalty percentage is written into the smart contract, which ensures that it is transparent and immutable.
Step 4: Sale of the NFT on Secondary Markets
When an NFT is sold on a secondary market, the smart contract attached to it is executed automatically. The smart contract calculates the royalty amount based on the sale price and the royalty percentage set by the creator. The royalty amount is then automatically sent to the creator’s wallet.
Step 5: Automated Royalty Payments
NFT royalties are automated, which means that creators receive their fair share of the sale price every time their NFT is sold on a secondary market. The smart contract ensures that the royalty percentage is paid out automatically, without the need for manual intervention.
How are NFT royalties implemented technically?
There are a few different ways that NFT royalties can be implemented technically, but the most common approach is through the use of smart contracts.
When an NFT is created, a smart contract is deployed to the blockchain that includes the royalty percentage and the creator’s address. When the NFT is sold, the smart contract automatically calculates the royalty amount and sends it to the creator’s address.
Here’s an example of how this might look in Solidity, a programming language used to write smart contracts on the Ethereum blockchain:
contract MyNFT { address payable public creator; uint public royaltyPercentage; function setRoyalty(uint _percentage) public { require(msg.sender == creator, "Only the creator can set the royalty percentage"); royaltyPercentage = _percentage; } function transferFrom(address _from, address _to, uint _tokenId) public { uint salePrice = // get the sale price of the NFT uint royaltyAmount = (salePrice * royaltyPercentage) / 100; creator.transfer(royaltyAmount); // transfer the NFT to the new owner }}
In this example, the creator of the NFT sets the royalty percentage using the setRoyalty function. When the NFT is sold and transferred to a new owner using the transferFrom function, the smart contract calculates the royalty amount and sends it to the creator's address using the transfer function.
Pros of NFT Royalties
Ongoing Revenue: NFT royalties provide creators with a way to earn ongoing revenue from their works, which can be a reliable source of income. This means that the reward for their work won’t be a one-time benefit.
Fair Compensation: NFT royalties help to ensure that creators are fairly compensated for their works as they increase in value. This enables them to earn more as the value of their work increases.
Automatic Payments: Royalties are automatically deducted from the sale price of an NFT, which makes it easier for creators to receive payments for their works. The mode of agreement is executed on a smart contract without any intermediary, once the NFT is sold, it gets triggered automatically.
Cons of NFT Royalties
Decreased Sales: Buyers may be less willing to pay high prices for NFTs if they know they will also have to pay royalties every time the NFT is resold. This can lead to a decrease in sales volume and, ultimately, lower royalty earnings for creators.
Price Volatility: Price volatility can impact the frequency of NFT sales, which in turn affects the royalty earnings of the creator. Potential buyers may hesitate to invest in the asset, which can lead to lower royalty earnings.
How Does the Royalty Percentage Work?
The royalty percentage is determined by the creator and is typically set at the time the NFT is created. The percentage can vary, but it is typically between 5% and 15%. When the NFT is sold on a secondary market, the smart contract automatically calculates the royalty amount based on the sale price and the percentage set by the creator. The royalty amount is then automatically sent to the creator’s wallet.
Are NFT Royalties Reliable?
NFT royalties are incredibly reliable due to the nature of the blockchain. Smart contracts are stored on the blockchain, making them transparent and immutable. This means that once the royalty percentage is set, it cannot be changed, and the smart contract will automatically execute every time the NFT is sold on a secondary market. Additionally, the royalty payments are automated, ensuring that the creator receives their fair share of the sale price every time the NFT is sold.
Is it Possible to Transfer Royalties?
One important question that arises is whether NFT royalties can be transferred to other parties. The answer is yes, they can be transferred to other parties via a smart contract. This means that if an NFT is sold, the royalties will continue to be paid to the original creator, regardless of who owns the NFT.
What is the Significance of Optional Royalties?
Some NFT marketplaces have made royalty payments optional. This means that buyers can choose whether or not to pay royalties every time the NFT is resold. This approach can be beneficial as it encourages buyers to pay more for an NFT upfront, knowing they won’t have to pay royalties later. However, it can also be disadvantageous as it may discourage potential buyers from purchasing an NFT if they know they’ll have to pay royalties.
Are NFT Royalties Really Effective?
The effectiveness of NFT royalties depends on various factors. Price volatility can impact the frequency of NFT sales, which can affect the royalty earnings of the creator. Furthermore, buyers may be less willing to pay high prices for NFTs if they know they’ll also have to pay royalties every time the NFT is resold. However, NFT royalties can be a reliable source of income for creators if the NFT is valuable and in high demand.
Is It Reasonable to Remove NFT Royalties?
Some NFT marketplaces have eliminated NFT royalties, such as LooksRare. This decision may be reasonable for some marketplaces as it can encourage more buyers to purchase NFTs. However, removing NFT royalties entirely may not be reasonable as it could discourage creators from producing more works, knowing they won’t receive ongoing revenue from their art.
4 Platforms That Offer NFT Royalties
OpenSea
OpenSea was founded in 2017 and is the largest marketplace for non-fungible tokens. In February 2023, OpenSea announced a change in its fee structure, reducing its transaction fee from 2.5% to 0% for a limited time. OpenSea also stated that for NFT projects lacking on-chain enforcement measures, collectors would only be obligated to pay a nominal 0.5% royalty fee on old and new purchases. However, collectors can pay more if they think the NFT is worth more. This change will likely have a meaningful impact on the NFT market, positioning OpenSea as an increasingly accessible and cost-effective platform for collectors and creators alike.
On the other hand, users that implement the on-chain enforcement tools are entitled to full royalty payments of up to 10%.
Rarible
Rarible was established in 2020 and offers a user-friendly platform for creators to showcase their artwork. The process of listing an artwork on Rarible is straightforward, requiring you to create an account and connect a wallet. After that, you can begin uploading works and setting prices. Rarible charges a 1% fee on every transaction conducted on the platform, which applies to both the buyer and the seller. Furthermore, the platform allows creators to set a royalty rate of up to 50%.
SuperRare
Launched in 2018, SuperRare is a prominent NFT marketplace that has distinguished itself from other NFT marketplaces by emphasizing the uniqueness of its digital artworks. Prospective creators seeking to publish NFTs on the platform must apply for approval from SuperRare Labs. In addition, on SuperRare, when a secondary sale occurs, the original owner gets 10% as royalties, while the collector receives 90% of the sale. A fee of 3% is charged for every sale, which the buyer pays.
Foundation
Foundation, one of the largest NFT marketplaces, was launched in 2022. If you want to list your digital art or collectibles on Foundation, you need to wait for an invite from an established community member who has sold at least 1 NFT. Foundation charges a 5% fee on every secondary sale, while a 10% royalty is given to the original creator, and the seller gets the remaining 85%.
Why Are NFT Marketplaces Eliminating NFT Royalties?
Several factors contribute to the elimination of NFT royalties. One of the main reasons is that some collectors are not willing to pay the additional fee for royalties, leading to decreased sales. Additionally, some marketplaces have chosen to eliminate royalties as a way to differentiate themselves from competitors and attract more buyers.
Impact of the Removal of NFT Royalties on the NFT Community
The removal of NFT royalties may have a significant impact on the NFT community. Without royalties, creators may not receive ongoing compensation for their work’s increasing value, which could discourage them from creating new NFTs. Moreover, without royalties, collectors may not be incentivized to invest in NFTs, leading to decreased sales volume and potential loss of value for NFTs.
How to Add Royalties to NFTs?
Adding royalties to an NFT is relatively easy and can be done through the smart contract. The creator can set the royalty percentage, and whenever the NFT is sold, the smart contract automatically executes the royalty payment. There are also platforms such as Rarible, which offer creators the option to set royalties when minting their NFT.
Benefits of NFT royalties
Passive income: One of the most significant advantages of NFT royalties is the ability to earn passive income. Creators can set a percentage of the sale price to be paid to them every time their NFT is resold. This means that they can continue to earn money from their art, even if they have already sold the NFT once.
Incentive for creators: NFT royalties provide an incentive for creators to continue creating art. The ability to earn royalties on their art provides a source of income that can help support them financially. This can be particularly beneficial for emerging artists who may not have a steady income from their art yet.
Fair compensation: NFT royalties ensure that creators receive fair compensation for their work. In traditional art markets, creators are often not compensated for the increase in value that their art sees on the secondary market. With NFT royalties, creators can receive a percentage of the sale price every time their NFT is resold, ensuring that they are fairly compensated for their work.
Encourages a healthy secondary market: NFT royalties encourage a healthy secondary market for NFTs. Buyers are more likely to invest in an NFT if they know that the original creator will receive a percentage of the sale price every time it is resold. This can help to maintain the value of NFTs over time and encourage buyers to continue investing in them.
Increased transparency: NFT royalties increase transparency in the art market. With traditional art markets, it can be challenging to track the ownership and sale of art over time. With NFTs, all ownership and sales are recorded on a blockchain, making it easy to track the sale and ownership history of an NFT. This increased transparency can help to prevent fraud and increase trust in the NFT market.
How Creators Can Manage Decreasing Royalties?
NFTs are decentralized digital assets that are censorship-resistant, meaning they can be moved between individuals without interference from centralized intermediaries. Unfortunately, the NFT space has been experiencing a downtrend in royalty payments, which has been driven by the NFT marketplace war between Blur and OpenSea.
A number of strategies have been proposed, such as blocking transfers, burning tokens of non-royalty paying holders, and marketplace blocklists. However, these are centralizing strategies that undermine the decentralization that is the fundamental value proposition of NFTs.
Despite this challenge, there are still four increasingly popular ways that NFT creators can consider when it comes to compensating for down-trending royalties:
Hold-back supply
NFT creators can hold some of their NFT project’s supply back for themselves. The retained supply can later be used for primary sales, whether that’s in drip-like fashion over time for further funding or all at once as part of a wider IP deal. There are two general variations of this tactic: holding back unminted supply or holding back minted supply.
For instance, Terraforms took the 0% royalties approach and just opted for holding back unminted supply for later primary sales and to align themselves long-term with their community. Conversely, when goblintown.wtf team did its free mint in May 2022, they retained 1,000 NFTs and started with a 7.5% royalty on secondary sales (They’ve since moved to their own bespoke marketplace where a 5% royalty is enforced.)
LP with supply
In the NFTfi scene, creators or collections can provide NFTs to automated market maker (AMM) protocols to earn trading fees from swaps. The idea is that a project can add its NFTs to a liquidity pool (liquidity providing) and then earn a cut every time people buy or sell through the team’s liquidity. An advantage of this strategy is that it allows a team to earn revenues from their NFTs without conducting primary sales.
For instance, the Sappy Seals team acquired 50 of its own NFTs and then started LPing with these NFTs on sudoswap in August 2022. Since then, the team has earned many thousands of dollars’ worth of revenue courtesy of trading fees. Other projects that have used this LPing strategy with similar success include Based Ghouls, Finiliar, and Allstarz.
Cross-chain royalties
NFT creators can consider cross-chain royalties as a way to maximize their revenue. This involves minting NFTs on different blockchains, such as Polygon or Binance Smart Chain. With this approach, creators can expand their reach and audience, which can result in increased royalties. For instance, FluffyDucks.io mints its NFTs on both Ethereum and Polygon, and this has helped to generate more revenue.
Enhance utility
To increase the demand for their NFTs, creators can add utility to their NFTs. By doing this, they can make their NFTs more valuable, which can help to compensate for downtrending royalties. For instance, an NFT project could offer exclusive access to a community or give holders early access to new features. Another example is to offer staking, where holders can earn a share of the project’s revenue, thereby increasing the incentive to hold the NFTs.
The Optional Royalties Debate in the NFT Market
A debate has arisen over the issue of royalties — should they be mandatory or optional? While some marketplaces continue to enforce royalties, others such as LooksRare, Magic Eden and X2Y2 have shifted to an optional system. This has sparked a discussion about the pros and cons of each approach.
One of the main arguments in favor of mandatory royalties is that they provide a sustainable revenue stream for artists. However, as the NFT market has evolved, the secondary market has become less profitable for creators, with many platforms abandoning royalties altogether. This has led to declining revenue for artists and a growing trend towards optional royalties.
On the other hand, some argue that optional royalties attract more buyers, thus increasing the overall volume of sales. This benefits both artists and platforms, as it generates more revenue and exposure for their work. Moreover, it provides buyers with greater flexibility and autonomy over their purchases.
Despite these advantages, critics argue that optional royalties create a race to the bottom, where marketplaces compete to offer the lowest fees to traders. This can lead to a situation where artists are left with very little revenue and lose out on the benefits of their creations.
There is also concern that the enforcement of royalties remains a challenge, as smart contracts are voluntary and subject to manipulation. This has led to some artists creating blacklists of marketplaces that do not enforce royalties, while others are exploring the possibility of legal or protocol-level solutions.
Ultimately, the debate over mandatory versus optional royalties highlights the need for a sustainable business model for the NFT market. While royalties have been an effective means of revenue for artists, the current trend towards optional royalties suggests that a new approach may be needed. By finding a different carrot that benefits both artists and buyers, the NFT market can continue to grow and evolve in a way that is fair and equitable for all involved.
In conclusion, despite being a relatively new concept, NFT royalties have significantly changed the art world. The advent of NFTs has provided creators with a reliable source of income, enabling them to continue their craft. Furthermore, it has opened up a new market for digital assets that were previously undervalued or ignored.
As the use of NFTs grows, we can anticipate further transformations in art creation, sale, and valuation. Therefore, NFTs have not only revolutionized the art industry but also have the potential to shape the future of creative expression.
Exploring NFT Royalties: The Only Guide You Have to Read was originally published in CryptoStars on Medium, where people are continuing the conversation by highlighting and responding to this story.