What Are NFT Royalties: A Comprehensive Guide w/ Use Cases

A flourishing world of cryptocurrencies offers much more than speculative coins and tokens to traders and investors. It’s an encompassing digital landscape that features opportunities for artists, creators, and consumers to interact with each other in a meaningful way. One tool that made that whole system possible is NFT royalties.

Throughout history, royalties have been invaluable in the lives and work of creators. They represent compensation for their art and creativity, allowing them to keep building for the benefit of the whole world.

However, this monetary model comes with some major flaws, which NFT royalties aim to amend. But how exactly do they do that? How do cryptocurrency and blockchain fit into the creative industry? What benefits do they give to the artists, and what does all that mean for the buyers and consumers?

In this article, we’ll explore the intricacies surrounding NFTs and their royalties to answer all these questions and provide a comprehensive explanation. Let’s get started!

What Are NFT Royalties?

NFT royalties are payments made to original creators that happen every time their work is sold or traded as a token. They combine the concept of NFTs from the realm of cryptocurrencies with the idea of royalties from the world of traditional finance.

NFTs (non-fungible tokens) were created with the idea of leveraging the transparent and immutable properties of blockchain to provide users with true ownership over unique digital assets. They are different compared to other cryptocurrency coins and tokens, such as Bitcoin, Ethereum, or Tether, where all coins and tokens are interchangeable with one another.

The term “non-fungible” describes the unique characteristic of NFTs that makes each one distinct. As a result, NFTs can be used as tokens of ownership over various items, assets, and art pieces, including music, images, digital real estate, and even tweets.

On the other end, royalties represent payments to artists and creators issued every time they perform or their work is reproduced. For example, in the world of traditional media and fiat currency, a musician gets paid every time their music is played or when they play for their audience, and a painter earns money from selling their paintings.

NFT royalties aim to expand on the core principle of royalties by offering recurring payments to original creators. In essence, they are resale royalty rights bound to occur whenever someone sells an NFT. This principle allows creators to be continuously paid for their work, potentially long after the initial sale.

Instead of a traditional painter getting a one-time payment for their canvas, a digital artist can keep earning revenue every time a new owner decides to sell one of their works of art. Not only that, but if the value of their work increases, so does their revenue.

How Do NFT Royalties Work?

NFT royalties work by utilizing the power of blockchain technology and smart contracts. You can think of blockchain as a platform that creators can use to mint and store their work. It also keeps records of an NFT's past and current owners, as well as all transactions.

The most common blockchain that a lot of creators use to mint their NFTs is Ethereum. However, Ethereum tends to run into scalability issues, and gas fees can get rather high, which is why there are alternative options. Other networks include Solana, Cardano, Tezos, Polygon, and so on.

However, blockchain merely provides the underlying infrastructure, while smart contracts make NFT royalties truly possible. They are programmable pieces of code that automatically execute once the written-in conditions are met.

That property is used to facilitate the royalty system. When an NFT is created (minted), the issuer can “attach” a smart contract programmed to send a set percentage of any future sale to their crypto wallet.

Many creators use a royalty rate of around 6%, though that figure can be lower or much higher. So, say a digital artist creates a piece and sells it for 10 ETH. They’d get the full initial sum (minus the marketplace’s fee) but also 6% from every future sale. If their art then sells for 1000 ETH, they’d get 60 ETH in royalties, which is six times higher than the initial profit.

Other important aspects of NFT royalties are decentralization and trustlessness. In essence, since the processes are governed by smart contracts and happen on the blockchain, there’s no need for a third party to oversee them.

On the other hand, there are some interoperability concerns, as the concepts and executions vary between blockchains and marketplaces.

What’s the Purpose of NFT Royalties?

The main purpose of NFT royalties is to provide original creators with a continuous stream of income.

One of the biggest downsides of the traditional royalty system is that many artists and creators usually receive one-time payments for their work. Despite the fact that their work is accessible to many people and offers ongoing value and relevance, they do not see recurring revenue.

On top of that, various creative mainstream industries have seen a decline in the royalties that they offer to creators. For instance, Spotify pays creators between $0.003 and $0.005 per stream. The numbers drop even lower in the graphic design industry, where it’s harder to repeatedly generate revenue due to the difficulties of preventing unsolicited art reproduction.

That’s why NFT royalties can be seen as instruments for empowering creators and allowing them to benefit from the appreciation of their work. Even if the initial sale results in a modest sum for the creator, by leveraging NFT royalties, they can earn much more should their work appreciate in value and continue to be traded and enjoyed.

Another benefit of NFT royalties is their flexibility. Virtually any creator in the digital realm can take advantage of them. Here are some examples of NFT royalties and who can use them:

• Digital artists can sell digital paintings and drawings, animations, sculptures, 3D models, and more
• Musicians can create unique tracks, limited edition albums, and even tickets for exclusive live performances
• Game developers can add unique assets to their video games in the form of cosmetics, equipment, collectibles, and more
• Writers can offer limited editions of their work, akin to special editions of real-life books and graphic novels
• Celebrities can offer their followers unique experiences and memorabilia

NFT Royalties and Art Market Efficiency

NFT royalties may improve the art market's efficiency on a global scale. The majority of artists in the traditional market fall into two distinct categories. A smaller group of high-ticket creators often overprice their work, resulting in a rather modest demand. On the other end are low-ticked creators who might struggle financially.

By providing a more regular and stable stream of income, NFT royalties can help both ends of the spectrum better price their art. High-type creators can make their art available to a broader audience without damaging their income, while less famous artists can potentially earn more from their creations.

Additional efficiency comes due to the nature of blockchain. Transparency, decentralization, and security result in no need for third parties, meaning NFT royalties are automated and don’t incur additional fees. This approach reduces delay, allows for better art tracking, and eliminates the chances of forgery or unauthorized copying.

What’s the Role of Marketplaces in NFT Royalties?

NFT marketplaces have a crucial role in the royalty system. These platforms made the arrangement possible in the first place.

On the user’s end, NFT marketplaces like OpenSea and Rarible provide a friendly and streamlined Web3 experience. They facilitate everything from the minting process to initial purchases and resales. Simply put, they act like websites that even mainstream individuals unfamiliar with cryptocurrencies can use to purchase and sell NFT art and assets.

More than that, marketplaces provide the necessary infrastructure to allow for the embedding of the NFT royalty smart contracts in the first place. They act as the overarching authority that enforces the policy and pays royalties to the issuers.

However, that’s where some of the issues with this model appear. Due to the decentralized nature of the crypto space, it’s challenging to come up with a uniform NFT royalty standard. For instance, OpenSea NFT royalties can be vastly different from those of Rarible, both in the way they work and the value they give to the creators.

There’s also the issue of interoperability. If a piece of digital content is removed from one marketplace and resold on another, the creator won’t get any royalties since they are tied to the original platform.

Finally, there’s the “race to the bottom” issue that became prominent after the NFT craze of the bull market faded. Some marketplaces removed the royalty model, leaving digital artists back where they started. It wasn’t long before others followed suit. With no legal obligations in place, nothing prevents them from omitting royalties in favor of personal profit.

Still, there are community efforts to create black lists of marketplaces that removed royalties and white lists of those who didn’t. The goal is to spread awareness and enforce an ecosystem-wide policy that would benefit the creators.

NFT Royalties & US Regulation

Some of the biggest challenges regarding NFT royalties in the US are of a regulatory nature. In most states, the only way for traditional artists to get royalties from the reselling of their work is through individual contracts with resellers.

However, that can take a lot of time and resources, and the rewards are not guaranteed. Moreover, some artists (e.g., visual artists) are particularly at a disadvantage since copyright laws can’t prevent everyone from redistributing illegitimate copies, directly impacting the creators’ revenue.

NFT artists are faced with a different problem. Smart contracts are called that only in name but aren’t recognized as contracts by law. Even marketplaces that offer NFT royalties do everything to legally protect themselves in the eyes of financial regulators. Simply put, they aren’t required by law to continue to pay royalties.

On the other hand, almost every method of making an income in the world of cryptocurrencies, including NFT royalties, is taxable. The IRS recognizes NFTs as property for tax purposes. However, there’s still no concept of “recurring” property. Regardless, it’s essential to consult a tax professional, both as the original owner and as a reseller earning profit.

Another way to look at NFT royalties is through the lens of securities law. Even then, it’s hard to clearly define the model. Collectibles have existed as assets for a long time and haven’t been considered securities. Yet, the nature of blockchain, NFT platforms, and token minting gives them security properties.

Ultimately, there’s no clear-cut regulation regarding NFT royalties, but there is an ongoing debate. As a result, creators and holders who plan on reselling are advised to pay attention to the latest developments and stay informed.

The Future of NFT Royalties

While it’s difficult to predict the exact future of NFT royalties, it’s possible to make an educated guess based on their admittedly short history. Here is what we can expect going forward:

• Mainstream adoption. As more artists and creators familiarize themselves with blockchain and its perks, we can expect a broader pool of issuers as well as a wider audience.
• Interoperability advances. Currently, there are many issues regarding interoperability between different blockchains and marketplaces. In the future, we can expect efforts to be made to standardize NFT royalty practices.
• Smart contracts evolution. As the crypto space continues to develop, we will likely see smart contracts gain more utility, offering more advantages. That can result in lower fees and greater perks for both issuers and buyers.
• Regulatory precision. At the moment, the regulatory landscape presents one of the biggest challenges on many fronts. Creators get no protection, and they always need to be vigilant when it comes to taxes. The future might see better regulation regarding NFT royalties, providing creators with much-needed clarity and stability.
• Unification with traditional media. As mainstream adoption continues and the world of DeFi keeps integrating with TradFi, we might see more real-world utility from NFT. Their use could extend beyond digital assets. For instance, physical art, such as sculptures and paintings, could be combined with digital, non-fungible tokens.

Key Takeaways

NFT royalties set a new standard when it comes to rewarding creativity. While NFTs overall have fallen in popularity due to the influence of a bear market, they have proven to be more than a fleeting trend.

Digital artists, musicians, influencers, and other creators can all leverage this financial model to receive recurring payments. That allows them to better focus on their work while their audiences continue to enjoy their efforts and simultaneously provide effortless support.

While there are plenty of challenges left ahead, it’s clear that NFT royalties stand to be more than a method of monetary gain—they aim to redefine the entire creator landscape!