Understanding NFT Royalties: What they are and How they Work

You may have known that NFTs are digital assets such as songs, pictures, in-game items or certificates that are stored on a blockchain. NFTs cannot be exchanged equivalently like common coins or tokens but they can be traded by using crypto.

One problem is that the price of an NFT depends on the needs of the market or how much money people are willing to pay for that NFT. As a result, the price of an NFT can be low at the beginning and become much higher later leading to a huge disadvantage for creators.

That’s why, recently, many marketplaces have allowed NFT creators to receive royalties as a passive income, yet many still don’t know what royalties are and how it works. In this article, you will find a clear explanation of all NFT royalties.

What are NFT royalties and what are they for?

NFT royalties are a percentage of the sale price given to the creator every time an NFT is sold in the marketplace. Royalty payments are perpetually and automatically executed by a smart contract mechanism. Royalty rate is set due to the creator and the limit is different from marketplace to marketplace. It can be from 5% to 10% or even up to 30%.

NFT royalties are an amazing way for the community to show appreciation for the works of artists, content creators or game developers. It is also a way for creators to earn a profit. The more valuable their products are, the higher the prices that they can be sold at. When the price of an NFT goes up, creators will receive more money, which is a good way to reward the deserving creators.

Since the NFT royalty policy was applied, many content creators have rushed to the NFT bandwagon. It is a new way to motivate creators and protect copyright.

How do NFT royalties work?

NFT royalties are different from traditional royalty payments. NFT royalties are automatically paid to the creators or artists when their NFTs are resold due to the smart contract mechanism. From the second sale onwards, the fee is ensured to be paid by the smart contract terms.

There is no third party interfering in this process. Everything is automated by the help of smart contracts to ensure 100 percent that the royalty is paid in full. There is no chance for the buyer to cheat out of the royalties.

It is noticeable that although most NFT trading platforms have now enabled creators to receive royalty, not any NFT yields royalties. The terms about royalty shall be set clearly and specifically in smart contracts at the beginning. Moreover, the rate once set is fixed overtime. You can never change your royalty percentage.

Many may think 5% or 10% of an artwork sell is not much. However, you should consider how much the price can go up in the future. It can be from 10 times to 100 or even 1000 times higher than the floor price. For example, Jaques Grft, an electronic musician received around $27.000 in royalties from 2011 netting.

Bottom line

Royalties make it possible for people to respect their idol’s masterpieces. This is to stimulate musicians, content creators and artists to involve more in creating and trading their works as NFTs. From now on, artists can have deserving shares from their works in perpetuity.