Earnings for NFT Creators: Royalty

With all the talk about NFTs, artists, and creators found something cool. Even after they sell their NFTs, there's a way they can keep getting rewards in "NFT royalties." This bonus is getting a lot of interest because artists and creators see it as a neat way to keep making money and getting recognized for their work. It's like adding an extra layer of excitement to creating digital assets and showing off their creations.

What are NFT Royalties?

NFT royalties work like this: when someone sells a digital collectible again after buying it, a portion of the sale price goes back to the original creator. This is similar to how musicians and filmmakers get paid for their work whenever their creations are used. These royalties help creators earn money over time. The amount taken from the seller's earnings in the secondary market can be anywhere from 0% to 10% on most platforms. (1)

Keep in mind that not every NFT will generate royalties; this detail needs to be explicitly included in the smart contract terms. (2)

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. 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 benefiting even a penny from subsequent sales no matter how high a price it commands, hence the common concept of impoverished or starving artists.


Figure 1. Thaw Painting Source: Pinterest

For instance, in 1958, artist Robert Rauschenberg sold his painting "Thaw" to Robert Scull for $900. A few years later, the same painting was sold again for a much higher price of $85,000. This caught Rauschenberg's attention, and he began to speak up for artists to receive payment when their artwork is resold. Although he faced initial challenges, his efforts led to the passing of the California Resale Royalty Act in 1976. This law ensured that artists would earn a portion of the proceeds when their artwork is sold again. However, in 2011, it came to a halt in 2011 due to a clash with the federal Copyright Act, which grants protection primarily to specific creators such as composers, writers, and filmmakers, without extending the same safeguard to visual artists. (3)

Such challenges incentivize new opportunities that allow the NFT market to thrive as many artists were drawn to the NFT market because of its simple way of allowing them to earn royalties from reselling their art. Without this royalty system, creators would not have the option to have long-term profit from their creations.

How Do NFT Royalties Work?

Figure 2. How NFT Royalties Works Source: synodus

Key Players in the Transaction

Let's dive into the cast of characters in an NFT transaction. First up is the creator, the mastermind behind the project. They're the ones who create, mint the unique NFT and put it up for sale. They decide if and how much they want to earn when their creation changes hands in the future. This earning, called a royalty, is a fraction of the transaction amount. Usually, this royalty is the same for all pieces in a collection, but in some cases, creators can set different rates for each item.

Next, we have the seller. This is the person who sells the original NFT to someone else on a secondary marketplace. The deal between the creator and the first owner doesn't involve royalties, but after that initial sale, the creator gets a slice of the pie every time the NFT changes hands. If the creator is also the seller in an NFT transaction, they would play both roles. As the creator-seller, they would initiate the sale of the original NFT to a buyer on a secondary marketplace. In this scenario, they would be responsible for both creating and selling the NFT. While the deal between the creator-seller and the first owner would still not involve royalties, the creator-seller would continue to receive a portion of the transaction amount each time the NFT changes hands after the initial sale. The marketplace's role as the referee would remain the same, ensuring that the rules are followed and facilitating the automatic deduction of royalties from the seller's earnings to be sent to the creator-seller. The amount going to the creator-seller would still be based on the value of the transaction and the agreed-upon royalty percentage.

Now, let's bring in the third player: the marketplace itself. Think of the marketplace as the referee. They're the ones running the show behind the scenes, making sure the rules are followed. They use a smart contract to automatically take out the royalty from the seller's earnings and send it to the creator. How much goes to the creator depends on the value of the transaction and the agreed-upon royalty percentage (1).

The Marketplace's Big Role

While the creator and the seller are the main characters, the marketplace is the unsung hero. They're the ones ensuring everything goes as planned. However, different marketplaces have their own way of doing things. For instance, some marketplaces quickly send the creator their cut as soon as a sale happens. Others might do it on a regular basis. There are even cases where creators receive protocol fees instead of royalties. And here's the twist, the marketplace can also decide if buyers should contribute to the creator's earnings. So, some marketplaces such as LooksRare, Magic Eden, and X2Y2 let the buyer decide whether to chip in a bit extra for the creator's hard work. To make things even more interesting, the marketplace can decide whether creators can carry over their royalty rules to other platforms. This can lead to some tricky situations, like the ongoing tussle between OpenSea and Blur (4). Creators might find it tricky to sell their NFT on one platform and still get paid for secondary sales on another. (1)

Benefits Of Royalties For Creators

The benefits of NFT royalties are substantial, offering creators a unique advantage in the digital art marketplace. By setting a reasonable percentage, creators can avoid deterring potential buyers while still reaping the rewards. One of the primary advantages is the consistent income generated each time their NFT is resold. This creates a reliable stream of long-term passive income, empowering artists to sustain their creative endeavors and explore new artistic ventures. As artworks get resale, the accumulated royalties enhance their financial stability. Moreover, NFT royalties contribute to the establishment of a verifiable record of income production, fostering transparency and accountability in the realm of digital art transactions. Undoubtedly, NFT royalties have the potential to become a significant and enduring source of financial support for artists, enabling them to thrive in an ever-evolving art landscape. NFT collections y00ts, Degods from delabs has been gaining attention for their innovative approach to NFT royalties, showcasing how this concept can benefit creators in practical and exciting ways. (6)

Reference

1. Christina Moro on Integral, NFT Royalties: Their Purpose and Mechanics for Creators, April 13, 2023
2. Alex Gomez on Cyber Scrilla, What Are NFT Royalties? (Here’s How It Works), January 10, 2023
3. Vertu Fine Art, Chuck Close: Battle for artists' royalties is over, August 07, 2018
4. Cam Thompson, Blur Escalates Royalty Battle With OpenSea, Recommends Blocking Platform, February 16, 2023
5. Mitchell Grant and Shannon Ullman on Milkroad, What Are NFT Royalties & How Do They Work?, July 6, 2023