NFT Royalties: What They Are and How They Work

Cryptonews

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

A content creator will always receive 100% of the price for their work during the first sale. During the minting and listing process, the creator sets the amount of royalties they’ll receive for secondary sales —it typically ranges from 5-10%. If an NFT is sold for $10,000, the current owner will receive $9,000, while the original creator receives $1,000 directly paid to their wallet address.

How Do NFT Royalties Work?

Royalties apply to almost any NFT in existence —artwork, profile pictures (PFPs), tokenized music albums, images, avatars, etc.; the same mechanism applies: The royalties are coded into the smart contract of a blockchain platform, and for each secondary sale, the smart contract takes care of enforcing the terms and conditions needed for royalties to take place.

The contract then reserves a percentage that’s later delivered to the original creator, as mentioned above, and the currency is usually the one supported by the platform —e.g., 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 deal with NFT royalties.

Royalties do not fluctuate with market movement —the sale price of the NFT varies through time due to multiple factors (market demand, scarcity, utility…) and therefore causes variations in the amount of profits 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 the NFT and crypto community at large. Some people dislike NFT royalties because it means paying a cut to the original creator, and this might drive away potential buyers.

On the other hand, other people 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 be artists, musicians, project developers, businesses, etc.

Further, NFT royalties also foment competition as the royalty system greatly rewards originality —the more valuable, useful, or unique something is, the higher the chances that buyers will pay a royalty to original creators.

NFT royalties, while a simple concept at first glance, have become a problematic subject for the NFT community. The main parties —content creators, traders, and marketplaces— have long discussed and disagreed on how to define an NFT royalty system properly. This has led to severe frustration within the community. Some NFT marketplaces like X2Y2 decided to replace the traditional royalty system with enforced optional royalties.

Overall, NFT royalties provide creators with an ongoing income stream and control over their art, while also benefiting collectors, speculators, and platforms within 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 earnings, which essentially allows NFT owners to decide whether or not they want to pay a percentage of sales to creators.

NFT platform LooksRare uses optional royalties, which allows 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 directed to 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.

Benefits of NFT Royalties

There are several benefits of NFT royalties, including:

  • NFT royalties provide artists with an ongoing income stream, 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 different amounts
  • NFT royalties are coded into the smart contract on the blockchain, ensuring the terms of the NFT are fulfilled, and if a royalty is specified, a cut of the profits goes to the artist who created them.
  • Tie royalties to market demand that rewards and appreciates originality, incentivizing creators to produce high-quality content and benefiting 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 by volume. It offers optional royalties with 0.5% as the minimum for the creator. This was implemented in 2022 as part of an ongoing debate on NFT royalties
  • LooksRare: second-largest NFT marketplace. It offers optional royalties, providing creators with 25% of trading fees.
  • Nifty Gateway: Nifty offers enforced royalties. This means the platform takes 5% of each NFT sale plus 30 cents to cover fees associated with credit card processing.
  • Rarible: like Nifty Gateway, Rarible offers enforced royalties where the marketplace takes 2% total from the buyer and the seller alike.
  • SuperRare: enforced royalties as well; It takes takes 15% of the first sale. Each secondary sale allocates 90% to the collector, while the original creator receives 10% in royalties.

Criticisms and Controversies of NFT Royalties

Like any branch of the cryptosphere, NFT royalties have been the main cause of conflicts and debates within the NFT industry. Here are some of the main concerns and criticism surrounding NFT royalties:

  • Market manipulation: Some individuals might try to artificially inflate the price of an NFT, making use of all the tools at their hands to receive higher royalty payments.
  • Concerns of fairness: we previously talked about optional royalties, and it has raised concerns due to uncertainty regarding long-term sustainability and fairness for artists and content creators.
  • Ethical dilemma: this point is connected with some of the previous points regarding controversies and drawbacks. 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 communities.

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. The royalties also help distribute value more fairly within the NFT ecosystem and benefit collectors, creators, speculators, and platforms differently.

Featured image via Pexels.