If you've taken a dive into the crypto and NFT ecosystem, you've heard of creator royalties, a form of passive income that NFT projects and content creators can get from NFT sales on the secondary market. And perhaps you've noticed they are sometimes a bit of a hot topic. Let's take a closer look!
What are NFT royalties?
NFTs have the ability to distribute royalties from resales to NFT creators. With non-fungible tokens, NFT royalties give the original creator a percentage of the sale price each time their creation is sold on the secondary market.
Once minted, the NFT will earn a percentage on all future sales meaning artists can have their fair share of subsequent sales from their creations for perpetuity, which seldom happens in the real world. Every time a new owner re-sells the digital asset, the creator gets a percentage of the sale again. 5 to 10% is considered a standard royalty percentage, but with most NFT marketplaces, creators can set their royalty amount themselves during the minting process.
NFT royalties allow NFT artists and creators to earn from something they produced on a recurring basis, encouraging them to join the NFT space. As their popularity grows, the returns they get on their work also increases. As an example, when digital artist Beeple's NFT "Crossroads" was resold on the secondary market for $6.6M, Beeple received a 10% royalty from the transaction.
How do NFT royalties work?
NFT royalty payments are perpetual and automatic payouts to the creator for secondary sales, automatically executed through smart contracts.
The royalty features are coded into the smart contract on the blockchain. Not all NFTs yield royalties and the royalty systems can differ from one NFT marketplace to another, but it works in the following way: each time a secondary sale happens, the smart contract ensures that the terms of the NFT are fulfilled. No intermediaries need to be trusted to pay the royalty fee.
On the ETH (Ethereum) blockchain, the EIP-2981 token standard allows contracts, such as NFTs that support ERC-721 and ERC-1155, to signal a royalty amount to be paid to the NFT creator every time the NFT is sold on the secondary market. Marketplaces that support this standard must pay royalties for all sales, whatever the currency and wherever the sale took place (on-chain, over the counter and off-chain).
While leading NFT marketplaces such as OpenSea and Rarible honour the royalty, this isn't the case of every marketplace. As an example, marketplaces Blur and LooksRare made the decision to implement optional royalties. In the case of optional royalties, buyers can decide to implement the smart contract for royalty payments, or not. In short, it depends on the buyer, and the creator might not get royalties on secondary sales for their work, and might only make money when they sell new NFTs. Some platforms such as LooksRare have taken some steps like sharing some of their protocol fees with creators to alleviate the effects of this process. Many people consider low NFT trading volume and liquidity and the NFT market's instability during the bear market to be the cause for these decisions to make NFT royalties optional. Magic Eden opted to make royalties optional on Solana and Ethereum NFTs, and not to implement them at all on Ordinal NFTs.
Creators may have to do a little research when choosing the best NFT marketplace for them. Fungible tokens are becoming more subject to regulation, which is also likely to happen to non-fungible tokens, even though many regulations don't apply to tokens but instead to the players in the ecosystem.
NFT Royalties on Gamma
NFTs have many use cases such as digital art and collectibles, uses in the metaverse, real estate, music and more. Gamma, the leading marketplace on the Stacks blockchain with a 95% market share, specialises in collectibles and digital art, and helps promote curated works from unique creators. Stacks is a blockchain technology that enables smart contract functionality for Bitcoin and the development of dApps, DeFi and more.
The creator-first launchpad allows artists to deploy their own NFT collection with fully tested, creator-owned, no-code smart contracts in minutes. Once the collection is launched through the Gamma Creator Portal, creators can manage their Stacks collection with the Smart Contract Manager which also lets creators set their royalties for sales on the secondary market as well as accepted cryptocurrencies. If you're interested in launching your own NFT collection, join Gamma on social media and learn more about the platform!