What Are NFT Royalties, How They Work & Marketplaces

What Are NFT Royalties, How They Work & Marketplaces

What Are NFT Royalties & How Do They Work?

Non-fungible token (NFT) royalties, or NFT royalties, are fees that are paid to the original creator of the NFT in exchange for the use of that creator’s property. In other words, it’s a way for the NFT artist to bring in money after the initial sale, paid for by the buyer. Pretty sweet deal for the artist as it can result in a potentially never-ending stream of income off the back of a single digital asset. For the top NFT collections, this means millions.

To give a real-world analogy, imagine you write an absolute banger of a song. You record it, produce it, and sell it to a major label. You receive a windfall of cash for your genius. Because it’s so good, the major label promotes it everywhere. The track receives significant airtime and is sold to Google because they want to use it in a commercial. You get paid every time your track is sold or played.

To make it even simpler, it’s like winning the lottery and being given the option of taking an initial lump sum or a payout over time—and choosing both.

How Do NFT Royalty Fees Work?

Sometimes, blockchain-based interactions can be extremely convoluted. Fortunately, NFT royalties are pretty simple. They are set in place during the minting phase of creation when the digital asset creator mints their product and lists it on a marketplace. The creator chooses their royalty percentage and payout wallet, and, well, that’s basically it.

Once the NFT is resold to a secondary buyer, the original artist receives that royalty payout, which generally varies between 2-10%. The platform will usually take the same percentage as the artist as a “royalty fee.” This is taken from the buyer and won’t affect the price the seller receives.

The artist minting the NFT is the one who decides which royalty percentage to add to the contract. This is decided upfront and is applied during the minting stage. Those with more profitable collections or pieces can afford to lower their royalty percentages to incentivize trading.

NFT royalties are tracked on-chain with the use of smart contracts. Smart contracts facilitate the terms of an execution of an agreement (in this case, the sale of the NFT). It makes sure the creator receives their royalty percentage and is performed automatically. Smart contracts are probably the easiest way to guarantee royalties are paid.

How Are NFT Royalty Percentages Added?

Royalties can be added to NFTs in one of two ways. If the artist mints their NFT on a platform that automatically adds a certain royalty percentage, it would be embedded in the smart contract. In this instance, the artist won’t need to custom code the contract, as the minting platform already did it.

The second way a royalty contract is added is when the artist adds a custom contract to an NFT on the NFT marketplace. This generally allows the artist to choose their own royalty percentage, which is often lower than when the NFT platform chooses one for you.

There is a standardized NFT royalty system that applies to ERC-712 (there’s now ERC721-C that gives NFT creators even more control) and ERC-1155 interfaces. ERC-2981 is a standard that signals to other interfaces which royalty percentage should be sent and to where.

Before this was finalized/implemented in 2021, there was no real way for marketplaces to communicate royalty percentages. Some older collections don’t use it because they were minted and have been in circulation since before ERC-2981. Think CryptoPunks.

How Royalties Are Calculated

Since the smart contract says how much the artist will be receiving as a percentage of the sale, it’s super simple how NFT royalties are calculated. In some of the most basic math ever, when a sale occurs, the percentage is taken from the sale.

If the artist mints their NFT with a royalty percentage of 5%, and the NFT sells for 3 ETH, you would calculate what 5% of 3 ETH is, which is 0.15 ETH.

3 x 0.05 = 0.15.

That’s the artist’s royalty, which is sent to their wallet when the NFT is sold.

NFT Royalty Fee Example

Here’s a more thorough example: Jack the Artist mints an NFT on Blur (nice). When Jack mints it, he adds a custom contract with a 0.5% royalty fee because Jack isn’t greedy and that’s the minimum anyway. Jack the Artist mints a pretty rad NFT titled “Jack the Artist.” It sells nearly immediately for a wonderful 12 ETH. Classic Jack.

Before Jack the Artist gets paid for “Jack the Artist,” the marketplace registers the sale. Since Blur offers no-fee trading (as a way to lure traders away from OpenSea), the chain reserves Jack’s royalty from the sale price. Remember, that’s 0.5% of 12 ETH. So using the same math as above:

12 x 0.005 = 0.06 ETH. Jack just made 0.06 ETH, deposited right into his specified wallet. Nice.

Benefits Of Royalties For Creators

The only real drawback to creators is when they choose too high a percentage and may lose a buyer because of it.

Benefits include:

  • Income every time their work is sold
  • Which translates into long-term passive income
  • Which allows the artist to continue minting new pieces
  • While developing a record of income production

NFT royalties can be a major source of income for artists and should be implemented in a strategic way when it makes sense, which is often.

List Of NFT Marketplaces With Royalties

Royalties are great—but not every marketplace has them. That’s unfortunate for the seller as it favors the buyer, and is clearly the marketplace favoring traders over artists. However, there’s been a move to enact minimum royalty fees, which is cool. Here’s a list of marketplaces still using royalty fees, and whether or not they enforce them:

1. OpenSea

OpenSea website

  • Currently no fees
  • Optional creator earnings: 0.5% minimum
  • Not enforced if tradable on Blur.
  • Enforced fully if not also trading on Blur.

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