As artists and collection owners are discovering, one of the most useful features of NFTs is the ability to earn ongoing royalties from future sales. With this killer feature proving one of the biggest draws to the space, a lot of new content creators are now looking into NFT royalties.
Explained below is everything you need to know whether you’re an NFT newbie or trading veteran.
When a song is played on the radio, streamed on a platform such as Spotify, or mixed into songs by other artists, the original artist is compensated in the form of royalties. This model has proven to be a passive and ongoing source of revenue for musicians and the creative teams behind them.
The royalty system, however, is plagued with issues. Royalties are often delayed or neglected to be paid, with contention over amounts owed also a problem. The royalty system is also geared towards music, with other artists finding it difficult to collect payments made from future sales of their work.
Fortunately, NFTs solve this problem. Thanks to non-fungible tokens and the blockchain technology that underpins them, content creators now have a way to collect ongoing royalties from their work automatically.
NFT royalties are a pre-programmed percentage of sale prices that get forwarded to the crypto wallet of the original creator. Whether it’s the first, second, or hundredth sale, the creator will be issued their cut of the sale in perpetuity without having chase payments.
Also read: Top 20 NFT Blogs For NFT Enthusiasts
NFT royalties rely on smart contracts to function. When an NFT is minted, the governing smart contract is programmed with the royalty terms, including the original creator’s crypto wallet address and the amount.
Different platforms allow different amounts of royalty to be collected. The NFT space’s biggest marketplace, OpenSea, for example, allows creators to collect royalties between 0-10%. A 10% royalty fee from a 2 ETH sale, for example, would see the original creator issued a 0.2 ETH payment automatically.
This is possible because of the transparency of public ledgers used by blockchains like Ethereum. Using smart contracts, the blockchain can execute code automatically that will forward payments and ensure the correct parties receive the appropriate digital assets.
Smart contracts also mean there is no need for a governing third party. With most intermediaries expecting a share themselves, smart contracts ensure the original artists keep more of their royalties.
Upon minting a token, NFT marketplaces will give the option for artists to decide their royalty rate. Thanks to the immutability of blockchains, this rate is then programmed into the NFT itself and cannot be altered by future owners. Once written into the smart contract, an NFT’s royalties are then collected without any further intervention necessary.
Creators can determine the royalties of their NFTs as a percentage of future sales. OpenSea (https://opensea.io/) has an upper limit of 10%, whereas other platforms such as Rarible (https://rarible.com/) have no limit on royalty fees.
A lower percentage means future owners are more likely to sell the token, incurring lower fees from their point of view. For frequently traded tokens, such as collectibles, lower royalty rates make more sense, encouraging further trading. For NFTs such as original artwork, higher royalties are expected as they are traded less frequently.
The biggest beneficiaries of NFT royalties are the original creators themselves. This includes artists and collection creators or managers.
Traditional artists can especially benefit from minting their work as an NFT. In traditional art markets, after the original sale of a piece, an artist effectively loses all rights to revenue from future sales. Immortalizing a piece as an NFT on a blockchain not only exposes their work to a greater audience but also ensures they can continue earning an income from their work. This, no matter who the current owner is or how many sales have occurred.
NFT royalties also benefit the industry as a whole. With the guarantee of ongoing profits, royalties are bringing some of the most talented artists in the world to the space, confident their work will be a worthwhile endeavor.
An important point to note is that NFT royalties are not standardized across marketplaces. This means an NFT minted using OpenSea and then later sold on Rarible may not automatically issue payments to the original creator.
This issue is now being solved, however, with the implementation of the royalty fee interface standard, known as IERC2981 (https://eips.ethereum.org/EIPS/eip-2981). This will enable both ERC-721 and ERC-1155 NFTs to forward royalty payments to the original creators universally, no matter which marketplace is used to facilitate sales.
Thanks to the ongoing development of such standards, royalties are now seen as a viable and fruitful way to fund content creators through NFT marketplaces.
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