NFT Royalties: How They Work

NFTs, or non-fungible tokens, have become all the rage in recent times. These are essentially digital assets that are stored on a blockchain, making them provably unique and impossible to replicate. NFTs can take the form of anything from art and music to tweets and virtual real estate. While they have been around for a while, it wasn’t until the sale of the NFT artwork, “Everydays: The First 5000 Days” by Beeple, for a whopping $69 million that they caught the world’s attention. Since then, NFTs have become a sought-after commodity, with many artists and creators rushing to create and sell their own digital assets.

One aspect of NFTs that has gained a lot of attention in recent times is NFT royalties. Essentially, an NFT royalty is an agreement between a creator and a buyer, where the creator receives a percentage of the sale price each time the NFT is resold. This mechanism ensures that artists and creators get a share of the secondary market sales of their works, something that has been unheard of before in the world of art and collectibles.

But how do NFT royalties work? Let’s take a closer look.

NFT royalties are embedded into the smart contract that governs the sale of an NFT. The smart contract is essentially a self-executing contract that is stored on the blockchain. It contains the rules and regulations that govern the sale and resale of an NFT, including the royalty agreement. The contract can be programmed to automatically transfer a percentage of the sale price to the creator’s wallet each time the NFT is resold.

For example, let’s say that an artist creates an NFT of their artwork and puts it up for sale for 1 ETH. The buyer purchases the NFT for 1 ETH, and the smart contract automatically transfers the 1 ETH to the artist’s wallet. The smart contract also contains a royalty clause that stipulates that the artist is entitled to a 10% royalty on every resale of the NFT. Six months down the line, the buyer decides to sell the NFT for 2 ETH. The smart contract automatically transfers 0.2 ETH (10% of 2 ETH) to the artist’s wallet, while the remaining 1.8 ETH goes to the buyer.

In this way, the artist benefits every time their artwork is resold, regardless of how many times it changes hands. This is a major departure from the traditional art market, where artists only make money on the initial sale of their artwork. Since the majority of the value in the art market lies in the secondary market, NFT royalties give artists a more equitable share of the profits.

Another advantage of NFT royalties is that they provide a way for artists to monetize their work in perpetuity. Once an NFT is created, it can exist and be resold forever, unless the creator decides to take it off the market or destroy it. This means that an artist can continue to earn royalties on their work long after they have created it, providing a passive income stream that can support their artistic endeavors.

In addition, NFT royalties give artists more control over their work. Since the smart contract is embedded in the NFT, the artist can set the terms and conditions of the sale. They can, for example, stipulate that the NFT can only be resold for a certain price or with certain conditions attached. This ensures that the artist’s vision and intentions for their work are respected, even as it passes from buyer to buyer.

NFT royalties have also opened up new possibilities for collaboration between artists. Artists can now create joint NFTs, with different royalty percentages for each participant. This allows artists to leverage each other’s fan bases and create works that are greater than the sum of their parts. It also ensures that each artist gets their fair share of the profits, according to their contribution to the work.

However, NFT royalties are not without their challenges. One of the main issues is that the technology is still new, and there are few established standards or best practices for implementing royalty agreements. This can lead to confusion and disputes between creators and buyers, especially for high-value NFTs.

Another challenge is that the resale market for NFTs is still in its infancy, and it remains to be seen how profitable it will be for artists in the long run. While the sale of high-priced NFTs such as Beeple’s artwork and Jack Dorsey’s first tweet have made headlines, the market for lower-priced NFTs is still relatively small. It remains to be seen whether artists can generate significant income from NFT royalties over time.

Finally, there is also the issue of environmental impact. NFTs are stored on the blockchain, which requires a significant amount of energy to maintain. Critics argue that the carbon footprint of NFTs is too high, especially given that many NFTs are created purely as speculative investments and have little social or cultural value. This has led to calls for artists and creators to consider the environmental impact of their NFTs and to explore more sustainable alternatives.

In conclusion, NFT royalties represent a major shift in the way artists and creators are compensated for their work. They provide a way for artists to earn passive income on their creations and to benefit from the secondary market, something that has been lacking in the traditional art market. While there are still challenges to be addressed, NFT royalties open up new possibilities for collaboration, control, and revenue for the creative community. As the technology and standards around NFTs evolve, it will be interesting to see how artists and creators continue to leverage this innovative mechanism to support their work.