What Are NFT Royalties? (Here’s How It Works)

With NFTs in the limelight, artists and content creators are finding that these tokens can be very beneficial for them, even after they have sold their NFTs. This aspect is particularly interesting, they’re called NFT royalties.

If you are new to NFTs then you may be wondering; how do NFT royalties work? After minting multiple NFTs, I’ve developed a good sense of what royalties are and how they work.

What Are NFT Royalties?

NFT royalties are payouts that compensate the original creator every time a secondary sale of their digital asset occurs. The royalty percentage is set by the creator at the time of minting, commonly around 5-10%. This percentage is taken from the sale price and sent to the creator.

Here’s a quick video breaking down exactly what NFT royalties are and how they work.

These royalties are coded into the smart contract on the blockchain. Each time a secondary sale happens, the smart contract ensures that the terms of the NFT are fulfilled. If a royalty is specified, a cut of the profits goes to the artist who created them. 

There are no intermediaries needed nor does this depend upon the wishes of whoever is transacting them. Please note that, not all NFTs yield royalties. It has to be specifically written into the terms. Once the smart contract terms are clearly written into the blockchain, the rest is taken care of automatically.

This works equally well for digital content, gaming accessories, physical items, etc. NFT royalties are a never-before-opportunity to maximize the earnings of artists and content creators.

Artists have the benefit of getting returns for something they produced once on a recurring basis. Also as their popularity grows they end up getting increasing returns on their work.

This is an unbeatable proposition that NFT offers. A lot of digital artists and content creators are motivated by this and hence are rushing to join the NFT bandwagon. The royalty systems can differ from marketplace to marketplace. Newer marketplaces like Bluebox are coming up with alternate ways in which content creators can further benefit.

Traditionally after the first sale, the artist or creator did not have a way to track the subsequent transactions of their work. Once they had sold their work that’s all their earnings would be from that piece of work.

Regardless of how their fame has increased over the years, they do not stand to gain anything from the works previously sold. That was simply not how the system worked! 

The buyers of their work on the other hand can turn around and sell the same work at enormously high prices if they wait for the right time. This led to the artists not benefitting even a penny from subsequent sales no matter how high a price it commands. Hence the common concept of artists as impoverished or starving artists.

NFTs have brought in the opportunities to change this completely. Artists can have their fair share of the sales from their creations for perpetuity.

How Do NFT Royalties Work?

A percentage of the secondary sales amount can be allotted as royalty and the creator can determine this amount at the time of minting the work. Once minted, your NFT will earn you the percentage you chose, on all future sales of your non-fungible token.

While not all marketplaces are geared towards offering royalties, ones like Rarible let you enter royalties when minting an NFT.

Imagine that you have created an NFT artwork on Rarible. A fan of your art buys the artwork for say 8 ETH. So you have made 8 ETH (ETH). You also have coded into the NFT the term that anytime a sale occurs you will get 10% of the proceeds.

Now your buyer auctions your art for an even higher price in the marketplace. Presumably, your reputation has grown and hence the value of your work has gone up as well. Imagine that your buyer sells it for 200ETH. Since you have already precoded a 10% royalty into the NFT, you will receive 20 ETH from this sale.

Again the new owner might sell it at an even higher price and you get a 10% out of the new sale price again. Thus you will receive a recurring income from your creations. So with NFT royalty, you stand to gain from every sale of your work for as long as it keeps selling. It is certainly an awesome system!

No more impoverished artists or content creators. No more fakes and replicas flooding the market. Even if there are fakes it becomes easy to identify the original.

All this is possible because of blockchain technology. It is also sometimes referred to as Distributed Ledger Technology or DLT. Blockchain technology is basically an unalterable and transparent ledger that is decentralized.

This type of ledger preserves the integrity and authenticity of the work. It also has automated protocols to ensure that whenever conditions specified in the smart contract are fulfilled it takes the necessary action. It can complete its action without the need for an external agent or an intermediary. 

Blockchain technology and smart contract work together to ensure that the author is identified and the royalty payments are made immediately after the transaction is over. This removes any chance of the artist or author being cheated out of their royalties.

There is no risk of fraud or fake work being circulated. People who create can have complete trust that they will be getting their rewards. These rewards are not from any person or a patron, but directly from the action of the blockchain.

Who Gains from An NFT Royalty?

Musicians creators, content creators, and artists of all kinds stand to gain from NFTs royalties. The buyer also stands to gain as they are able to verify the authenticity of what they are buying. This enables them to proudly display their assets as well as resell them at an assured price. It’s a win-win!

Electronic musician Jaques Green had his track from 2011 netting around $27,000 in royalties. Mike Winkelmann who made news by selling his artwork for a huge sum of money; has programmed his NFT to issue a 10% royalty from each subsequent sale.

Steve Aoki, Ozuna, Kings of Leon, etc. are artists who are actively taking advantage of the new technology to generate sales and subsequent royalties. As you can see, it can be a substantial source of revenue for the creator and buyer alike.   

Why Use NFT Royalties?

NFT royalties are an easy and hassle-free way to keep earning from your hard work. NFT royalties are an excellent opportunity that artists, game developers, and content creators are able to tap into profits from secondary sales, which was never available to them previously in such a manner.

NFTs are a way of democratizing the payments made. Now an artist can get paid as easily as a sports superstar based on their popularity. It is only fair that they also benefit from secondary sales of their work.

Another cool thing about NFTs is that the token can sell but the underlying copyrights remain with the creators. The creators can now even sell a percentage of their rights to others as well. 

The new owners can also tap into the royalties earned for the NFTs due to the rights they now own. Not all marketplaces allow this but the recently launched platform Bluebox is an example.

Some aspects of caution do exist as potential cases of intellectual property are yet to be clearly formulated on such transactions. The tax consequences also have to be considered as those royalties and proceeds that come in will have to be handled as capital gains in most cases.

It is increasingly likely that NFTs would become estate assets and the transfer of these assets including royalty through wills, trusts and legal instruments have to be carefully sorted out. 

Tapping into NFT royalties is an excellent way for artists and creators to have their work yield substantial profit, even into the future when they are no longer in possession of their token.

Tokenizing assets allows for earning in secondary sales and also sharing the royalties with those wanting to invest in the rights. The age-old practice which allows intermediaries and businesses to profit while the artist remains impoverished has been eradicated.

The freedom and the opportunity offered by NFTs can be applied to physical goods as well so that all artists and creators (not just digital ones) can benefit from their work.

This makes it possible for artists and creators, in general, to sustain and continue producing quality work and getting what they deserve, as long as their NFT is being sold.