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How do NFT royalties work?

Updated: Oct 25, 2021

With the gain in popularity of NFT’s many artists begin to see the benefits this technology can bring into their work. Not only can minting an NFT ensure the scarcity of an art piece, but many marketplaces offer artists the opportunity to get royalties from their work. But what are those royalties exactly?

Royalties are a form of payment the original artist receives when his art piece gets sold on the secondary market. For example if the artist sets royalties of 10% and the original buyer resells his piece for $100, the artist makes $10 from the secondary sale.

This basically ensures that an artist can continuously make money from his work, even after he doesn’t own his piece anymore. This form of payment has unique value to the NFT space as all transactions are decentralized and transparent, making royalty payments a credible source of income. However there is still a lot of potential and room for improvements, as you will see later.

Royalties in the art world

Before blockchains and crypto royalties worked in a slightly different way. For the case of physical assets and art pieces it is nearly impossible to implement. The way physical art is bought and sold is often intransparent. When did the asset change hands? Was the actual price paid? These are questions that make royalty payments hard to implement in the real world, even with physical NFTs aleardy on the move.

This is where digital assets have an advantage over physical art, even before the invention of NFT’s. The way it works is by selling licences to people who have an interest in distributing your work. If all of this sounds complicated to you, let me show you an example to make things clearer:

  1. You like to paint digital pictures of cats and sell them on your website. This is a very limited income stream. You only earn money if someone buys from your website.

  2. Someone approaches you with an offer. He or she wants to put one of your cat pictures on a t-shirt and sell it in their online shop.

  3. You decide to make a licence agreement. The shop owner is allowed to distribute and sell your work. In return he pays you a royalty payment of 10% for every t-shirt he sells with your design on it.

Royalty payments are not only a form of a passive income stream, by licencing your work your work gets also distributed and marketed without you needing to do anything!

While digital products can more easily be traced back to its owner than physical products, you are never guaranteed to get paid for your work. Even with many copyright laws in place, actually enforcing those laws is a completely different thing. In the end many artists don’t want to spend time, effort and money on lawyers to ensure their copyright is not violated.

This is where NFT royalties come into place.

Setting up royalties

Setting up royalties when publishing your NFT on a marketplace is fairly easy. I put together a full list of marketplaces and the royalties they pay, which you can see here. As you can see, most marketplaces let you choose the percentage of royalty yourself. Keep in mind that the higher your fee is, the harder it will sell on secondary marketplaces. A good start is to set your royalty to around 10% and see how good your art sells.

After minting your artwork to the blockchain the percentage you set can’t be changed anymore!

As you can see in the list of marketplaces, there are generally three types of royalties that these platforms offer:

No royalty

Some marketplaces don’t offer any royalties. This can be the case, if the original asset is a product made by the site. For example CryptoKitties or NBA Top Shot both offer a marketplace and are the original owner of the artwork/collectible. But it also can happen that a marketplace is new and hasn’t implemented royalties yet.

Flexible royalty

The most common way is that marketplaces let the artist decide on the share they want to earn as royalties. Most websites offer a range from 0-100%, but some marketplaces like OpenSea limit the range to 0-10%.

Fixed royalty

Another common way is to set a fixed royalty for every artist. This approach is more beginner friendly but also limits the artist to the same percentage and leaves no room for improvement. The marketplace SuperRare for example has a fixed royalty of 10%.

Reselling an artwork with royalties

As you can see most marketplaces offer their artists the chance to receive royalty payments. However to this day most royalties are also limited to that specific marketplace, while selling NFT’s is not. Let’s have another example:

  • An artist sells his piece for $100 and has set the royalty payment to 10%.

  • Buyer no.1 resells it on the same marketplace for $200, therefore the artist receives another $20

  • Buyer no.2 now takes the artwork and sells it for $300, but on a different marketplace. The artist receives no royalty payment because the artpiece changed marketplace.

Future royalty approaches

However there are some approaches in progress to counter this loss of the royalty. One of the future ways this issue can be taken on is described in a proposal for an NFT Royalty Standard for the ethereum blockchain. Right now the royalty is a service provided by the marketplace and not built into the blockchain. By implementing this new standard, the royalty would be implemented directly into the token, meaning the payment would be automatically made for each transaction - no matter what marketplace the asset is sold on.

Another similar approach is the Algorand Standard Assets (ASA) framework, which offers an on-chain royalty payment using the Algorand blockchain.

Next to implementing royalties directly on the blockchain the marketplace SuperRare also works on a system they call “Collector Royalties”. The idea is to make collecting a more desirable activity and incentivizing secondary sales by introducing royalties for secondary sales. Next to the normal 10% for the original artist, the first collector will receive 1% royalties, the second collector 0.5% the third 0.25% and so on.

In my opinion an interesting approach and I am eager to see how it will perform in practice.

In general I am looking forward to seeing how NFT’s can be improved for artists even further and if all the improvements can drive more artists into the NFT world. If you want to stay updated with the NFT world, please consider subscribing to my email list to not miss out on anything!

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