December 7, 2022

What are NFT royalties?

What are NFT royalties, how do they work, and why might you want to use them?

Martin Půlpán

Co-founder, CEO

What are royalties?

In many industries, artists or authors are paid a percentage of each sale or public performance of their work. For example, when a label, like Universal Music, sells an artist’s album, for example Lady Gaga - Chromatica, Lady Gaga most likely receives some percentage of that sale. Similarly, when Amazon sells a copy of one of Stephen King’s books, as the author, he receives a percentage of each sale as well.

These percentage payments are known as “royalties,” and have become standard practice in most creative industries.

What are NFT royalties?

Royalties have also become a hugely attractive built-in feature of many non-fungible tokens (NFTs). These tokens exist on decentralized networks known as blockchains, and are unique digital assets that can be bought and sold. However, NFT royalties work a little bit differently than traditional royalties, and can bring tremendous benefits to creators.

When an artist sells their artwork (e.g. a digital image, video, or audio file) as an NFT, they will receive the asking price of the work (assuming they are selling it independently and as a standard sale, i.e. not at auction) upon completion of the first (primary) sale. Unlike traditional royalties, NFT royalties are not typically paid out from the primary sale.

Then, if the NFT is later sold by the buyer on a secondary marketplace, a fixed percentage of royalties will be paid out to the original creator of the work. This will happen every time the NFT is sold on a secondary marketplace (so long as the NFT marketplaces respect the suggested NFT royalty percentage coded into the NFT itself – more on this below). 

A royalties revolution…

Let’s zoom in a little bit on that last point: creators receive a percentage of every resale of their work… forever. 

To put this in perspective, we’ll take Vincent van Gogh as an example. Van Gogh only became famous after his own death, having sold very few paintings during his lifetime. If he had sold his work as NFTs, he wouldn’t necessarily have sold more, but think about the implications for his children and grandchildren. He has posthumously become one of the most famous artists who ever lived, and his paintings fetch more than $80M a piece at some auctions. If his heirs were receiving 10% of each resale of their great great grandfather’s work, the generational wealth could echo on for centuries.

But you don’t have to be one of the greatest painters who ever lived to benefit from NFT royalties. They can generate streams of additional passive income for artists, creators, and brands of all kinds, regardless of industry. They represent a new monetization paradigm that can be implemented in endless ways across numerous product verticals.

Problems with NFT royalties

While NFT royalties are fantastic for creators in many ways, not everyone is a huge fan, and there are good points on both sides.

One issue with NFT royalties is that they are currently implemented as suggested royalties, not as mandatory royalties. Thus, it is up to the marketplaces on which the NFTs are sold to enforce the suggested royalties. If they do not, the NFT can be transferred without the artist receiving any royalties. This also applies to anyone who sells or transfers the NFT outside of a typical NFT marketplace. Unless they actually choose to pay out the suggested royalty percentage, the original creator will not receive any money.

While it is possible to create NFTs that enforce hard-coded, mandatory royalties automatically, at the blockchain level, there’s one glaring issue that prevents most people from creating NFTs that do so. Say, for example, someone who has purchased a particularly expensive NFT (e.g. for 55 ETH) that has a mandatory 5% royalty fee hard-coded into itself. If this person wants to transfer their own NFT from their primary wallet to a cold wallet, or any other wallet, they would have to pay 5% of the price of the NFT back to the original creator of the NFT. They would not be very happy to have to pay 8.25 ETH to transfer an NFT they already own. This is the main reason hard-coded, mandatory royalties have not become popular in the NFT space.

Other critics of NFT royalties have a completely different gripe. Many NFT enthusiasts believe that NFT royalties are price gouging on the part of creators. The idea here is that many NFTs are already extremely expensive, and that charging additional royalties on top of the primary sale price they already received, is excessive and unfair to NFT buyers. 

It’s understandable that most buyers would not want to pay more than the sale price for anything, but, on the other hand, it’s also quite understandable that creators should continue to be paid for their work, especially if it appreciates in value and is making significant profits for resellers on secondary markets.

The verdict

At Artiffine, we believe that NFT royalties represent an exciting opportunity for creators, artists, and brands. While the enforcement mechanism for how they are paid out may not be perfect, most marketplaces currently still respect suggested royalty percentages, and many creators are reaping the benefits.

Detractors of NFT royalties may not like paying a bit more on secondary marketplaces, but we personally feel that as NFT royalties become more and more commonplace, the vast majority of users will take it as commonplace. In the case of taxes, nobody really likes paying them, but they’re necessary to keep society functioning properly. With NFT royalties, even if they are a slight inconvenience to some buyers, they open the doors for creators to make a fair living, long-term, and reap the benefits of their work for years after the primary sale.

Want to sell royalty NFTs?

If you’re a creator, artist, or brand looking to launch an NFT collection with built-in royalties, Artiffine can help. We can take care of the whole technical solution, design and build an NFT minting site for your primary sale, and sort out all of the legal nuances of your project. After helping to launch hundreds of Web3 projects, we are experience in honing concepts to create an impact and guiding the communication of the project to make sure your message is heard far and wide, loud and clear.

If you need help with any of this, reach out to us, and we’d be happy to discuss!

Martin Půlpán

Co-founder, CEO

December 7, 2022

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