How do NFT Royalties Work? (In-Depth Guide)

Introduction to NFT Royalties

Non-fungible tokens (NFTs) have become a popular way for artists and creators to sell their digital works and earn royalties on their sales. NFTs are unique digital assets that are stored on a blockchain, allowing them to be verified as authentic and owned by a specific person.

One of the main benefits of using NFTs is that they allow creators to earn ongoing royalties on their work. When an NFT is sold, a percentage of the sale price is paid to the creator in the form of a royalty. This can provide a long-term income stream for the artist, allowing them to continue creating and earning money from their work.

To understand how NFT royalties work, it's important to understand what they are, how NFTs are created and sold, and the current debate about the future of NFT royalties.

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What are NFT Royalties?

NFT royalties are a type of royalty system that applies to non-fungible tokens (NFTs). NFTs are unique digital assets that are verified on a blockchain and cannot be replicated or exchanged for other tokens on a one-to-one basis. Examples of NFTs include digital art, collectible items, and in-game assets.

Unlike traditional royalty systems, which are typically used for physical assets like books or music, NFT royalties are applied to digital assets that can be bought, sold, and traded on a digital marketplace. These royalties are often paid in the form of a cryptocurrency, such as Ethereum or Bitcoin.

How do NFT Royalties work?

NFT royalties are typically paid to the creator of an NFT whenever the asset is resold on the marketplace. This means that even after the initial sale of an NFT, the creator continues to earn a percentage of each subsequent sale.

For example, let’s say an artist creates a digital art piece and sells it as an NFT for 1 ETH (Ethereum). The artist sets the royalty rate at 10%, meaning that they will earn 0.1 ETH every time the NFT is resold. If the buyer of the NFT later resells it for 2 ETH, the artist will receive an additional 0.2 ETH in royalties.

The exact royalty rate is determined by the creator of the NFT and can vary from asset to asset. Some creators may opt for a higher royalty rate to ensure they earn more from each sale, while others may choose a lower rate to make their NFTs more appealing to buyers.

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How are NFT royalties different from traditional royalty systems?

There are a few key differences between NFT royalties and traditional royalty systems. The first difference is that NFT royalties are applied to digital assets, whereas traditional royalties are typically applied to physical assets. This means that NFT royalties can be paid out automatically and in real-time, without the need for intermediaries or manual tracking.

Another key difference is that NFT royalties are paid every time an NFT is resold, whereas traditional royalties are typically only paid out on the initial sale of an asset. This means that NFT creators can earn ongoing income from their work, even after it has been sold.

Additionally, NFT royalties are typically paid in the form of a cryptocurrency, whereas traditional royalties are often paid in fiat currency. This allows creators to easily and securely receive their earnings, without the need for bank accounts or other financial intermediaries.

How NFT Royalties Are Earned and Paid

Creating an NFT

To create an NFT, an artist first needs to create a digital work that they want to sell. This can be anything from a digital painting or sculpture, to a digital music or video file.

Once the artist has created their digital work, they need to use software to create an NFT from it that’s recorded on a blockchain. This process involves "minting" the NFT, which means adding it to the blockchain of choice (ex. Ethereum, Polygon, Solana) and making it a unique, verified digital asset that can then be transferred or sold.

Minting an NFT typically requires the artist to pay gas fees, which is a small amount of the cryptocurrency for the blockchain that the NFT will be created on, in addition to any platform fees, depending on the platform that is used for NFT minting (ex. OpenSea, Rarible). For example, if the artist is creating an NFT on the Ethereum blockchain, they will need to pay a fee in the Ethereum cryptocurrency, known as Ether. For more information on how to create an NFT and the associated costs, read our article.

After the NFT is minted, it is ready to be sold.

Selling an NFT

To sell an NFT, the artist needs to list it on a marketplace that supports NFT sales. These marketplaces, also known as "NFT marketplace platforms," allow buyers to browse and purchase NFTs from a variety of creators. Direct sales are also possible, if the artist personally knows the purchaser or simply wishes to gift an NFT to someone through a direct transfer. Regardless of which platform the artists use to sell their NFT, smart contract technology is used to facilitate the sale in a peer-to-peer format.

When an NFT is sold, the artist earns a percentage of the sale price, which is called an NFT royalty. The percentage of the sale price that the artist earns as a royalty is determined by the terms of the sale, which are typically set by the artist or the NFT platform. NFT royalties can be set up to a maximum of 10% on OpenSea but different platforms have their own possible ranges for NFT royalties.

As an illustrative example using the fiat currency, an artist might set the royalty percentage for their NFTs at 10%, meaning that they will earn 10% of the sale price whenever one of their NFTs is sold. If an NFT is sold for $1,000, the artist would earn $100 as a royalty. On the next sale of the same NFT, the artist would continue to earn 10% of that sale price. If the second sale is $2,000, the artist would earn $200 as a royalty, bringing their total royalties earned to $300.

NFT royalties can be collected into perpetuity and become a passive income stream for artists. This means that artists collect NFT royalties not just on the first sale of their NFT, they also collect royalties on all subsequent sales of that same NFT. Added over time, this can be financially lucrative if the sale price of an NFT is high and it is sold several times.

Collecting Royalties

After an NFT is sold and the royalty is earned, the artist needs to collect it. This typically involves the artist setting up a wallet on the blockchain where their NFT was minted. For example, if an artist minted their NFT on the Ethereum blockchain, they would need to set up an Ethereum wallet to collect their royalties. 

The artist can then receive in their wallet their NFT royalties whenever one of their NFTs is sold. MetaMask is a popular non-custodial wallet used by NFT holders, which can be connected to various NFT marketplaces such as OpenSea and LooksRare.

Once the artist has collected their royalty, they can use it like any other cryptocurrency, such as using it to purchase NFTs, pay gas fees to mint more NFTs or exchange it for fiat currency (ex. USD). 

Advantages of NFT Royalties

There are several advantages to using NFTs to earn royalties on digital art sales.

NFTs provide a way for artists to earn ongoing royalties on their work. This can provide a long-term passive income stream that allows artists to continue creating and earning money from their art, long after they first sold that NFT. This is a major advantage over the traditional approach, where artists receive just a small fraction of the value of their art once in its lifetime. With traditional art sales, the artist only receives payment for their work once. With NFT royalties, this creates a recurring revenue stream for artists based on one piece of work alone.

NFTs also provide a way for artists to authenticate and verify their digital art. Blockchain technology has now made it possible for artists to sell their digital art by creating scarcity, which wasn’t possible on web2. For an exploration of why you can’t just screenshot an NFT, read our article.

‍NFT royalties have been one of the major benefits that blockchain technology has made available to artists and creators globally. They are a way for creators to earn ongoing income from their work, even after it has been sold. NFTs now allow artists to associate a higher amount of monetary value to their work because ownership is automatically and irrevocably written on the blockchain.

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Future of NFT Royalties 

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Why are NFT royalties important?

NFT royalties are important for a few reasons. First, they provide a new revenue stream for creators of digital assets. In the past, creators of digital art, collectibles, and in-game assets had few options for earning ongoing income from their work. With NFT royalties, they can earn a percentage of each sale, providing them with a stable source of income.

Second, NFT royalties help to foster a more equitable and transparent marketplace for digital assets. By ensuring that creators are fairly compensated for their work, NFT royalties can help to incentivize the creation of high-quality assets and encourage innovation in the digital art and collectibles space.

Third, NFT royalties can help to build trust and confidence in the NFT market by providing a clear and transparent method for artists to generate revenue from their work.

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What is in the future for NFT Royalties?

NFT royalty payments are only enforceable by marketplace platforms, not on-chain. Although marketplaces have programmed NFT royalties into each sale made through their platform, this can be changed by the platform. Already, some NFT marketplaces have said they will not continue to collect NFT royalties (ex. Magic Eden, X2Y2), while others will (ex. OpenSea).

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There are multiple perspectives on this issue. Some artists and creators argue that they should receive a percentage of the sales price whenever their NFT is resold. This perspective is based on the idea that NFTs represent a new form of intellectual property that is created and owned by the artist. As such, the artist should be entitled to ongoing royalties as a way to fairly compensate them for their creative work.

However, others argue that NFTs are simply a new way to represent ownership of digital content and that artists should not be entitled to ongoing royalties. They argue that artists are fairly compensated when they sell their NFTs for the first time, and that it is not fair to expect them to receive ongoing royalties for a work that has already been sold. 

The debate over NFT royalties is ongoing, and there is no clear consensus on the issue. The debate will likely continue as the use of NFTs becomes more widespread. Ultimately, the question of whether or not artists should receive royalties for the resale of their NFTs will depend on how NFTs are perceived and treated by society, as well as the specific terms of the contracts that artists enter into when they sell their NFTs.

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Conclusions

NFT royalties have given artists and creators a new avenue to monetize their work. On web3, the ownership of digital assets can be verified automatically and irrevocably using blockchain technology. This empowers artists and creators to sell their work, for the first time, directly to their fans and to continue to monetize long-term their work through continuing NFT royalties. Although there is an ongoing debate in the web3 community about the future of NFT royalties, they have already shown that they bring massive benefit to artists and creators globally.

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