NFT Royalties: Who Is Winning the Cat-and-Mouse Game?

NFTs represent a significant shift in how art is presented, consumed, and sold. Non-fungible tokens can be used to confirm art ownership and accurately track provenance. They also give artists a new way to profit from their work. Royalty payments are a percentage of each secondary sale, going to the original artist. Traditional artists must license their artwork to retain ownership of the actual art and receive royalty payments. On the other hand, NFT artists can simply click a button during the minting process to turn on royalty payments.

In this article, we'll cover NFT royalties, how they work, and their impact on the art ecosystem.

What are NFT royalties?

When you enable NFT royalties, you must choose the percentage you'll be paid each time the NFT is sold. For example, if you mint an NFT with 10% royalties and it sells for $100 on the secondary market, $10 will be sent to your wallet.

However, even when you make that choice, there will be scenarios in which royalties aren't honored. Suppose you mint an Ethereum-based NFT on Rarible with a 5% royalty and sell it to another person. Then, that individual lists the NFT for sale on Blur and another person buys it. In this scenario, you wouldn't receive the 5% royalty because of Blur's policy on royalties.

Ethereum finalized a token standard (ERC-2981) on July 24, 2021, that allows NFT royalties to be honored across various marketplaces. However, each marketplace can choose whether or not to use this standard.

When minting an NFT on the Hedera network, you can set a custom royalty fee that is honored for all secondary sales. Additionally, you can set a fallback fee that is charged when the NFT is transferred without exchanged value.

How are NFT royalties calculated?

NFT royalties are calculated based on the sales price of the token. When marketplaces charge a fee, both the royalty and marketplace fees are based on the total sale price. Suppose the original owner sets a royalty of 10% and sells that NFT to someone on a marketplace that charges a 3% fee to the seller. Then, the new NFT owner lists it for $100 on the same marketplace, and another user buys it. In this case, $10 would be transferred to the original owner, and $3 would be transferred to the marketplace.

ERC-721 is the original NFT token standard. Ethereum later released the ERC-1155 standard, allowing users to manage any number of fungible, non fungible, and semi-fungible tokens. Both token types support the addition of royalties via the ERC-2981 token standard.

Royalties can be calculated on-chain via smart contracts and enforced regardless of the marketplace used for subsequent sales. However, in some cases the NFT marketplace facilitates the royalties off-chain.

Some NFT marketplaces allow creators to set optional royalties. (And some marketplaces require optional royalties.) Optional royalties allow NFT traders to set the NFT royalty percentage to zero, even if the creator sets a royalty fee. For example, the popular marketplace Blur is a trader-focused NFT marketplace with optional royalties for buyers.

Late last year, OpenSea announced a tool to enforce royalties on-chain and block royalty-optional marketplaces like Blur. In response, Blur urged NFT creators to block OpenSea. This situation highlights the ongoing debate over whether NFT royalties are a good or bad thing for the NFT ecosystem.

Many marketplaces and artists seek to force buyers to pay royalties, while others try to circumvent these fees. This leads to a game of cat and mouse, with each side devising new methodologies to get their way. "I think the creator royalty argument is actually a lot simpler than people make it out to be," tweeted Beeple. "There is zero way to force royalties technologically, so creators will have to build a collector base that want to honor these royalties. … It’s really that simple."

Advantages and disadvantages of NFT royalties

NFT royalties work in favor of the creator over the collector in most cases. Still, NFT collectors can benefit from trading digital assets and may be eager to support the tokens' creators.

Royalties let content creators earn passive income and benefit from continued interest in their projects. This incentivizes artists to continue contributing to the NFT ecosystem and encourages new creators to mint their art. NFT royalties can also boost an NFT's value since NFT holders must factor in the royalty fees when pricing secondary sales.

On the other hand, collectors may be less likely to buy an NFT if they know they must pay a significant sum in royalties upon selling it. Suppose you mint an NFT with 30% royalties and sell it for $100. In this case, the new NFT holder must sell it for at least $130 to break even (not accounting for the marketplace and transaction fees they'll pay). In most cases, creators set their royalties somewhere between 6% to 10% to avoid discouraging people from buying their tokens.

NFT royalties in the real world

Many artists and companies have benefited from NFT royalties. According to a 2022 report by Galaxy, over $1.8 billion has been paid in NFT royalties on just the Ethereum blockchain. Yuga Labs, the creators of the popular Bored Ape Yacht Club collection, topped the chart at $147,602,791. Other top royalty earners include Art Blocks, Chiru Labs, VeeFriends, and World of Women.

Interestingly, the report suggests that 10 entities account for 27% of all royalties earned on the Ethereum blockchain.

The future of NFT royalties in the art industry

The future of NFT royalties will vary from chain to chain. Some networks cannot enforce royalties on-chain, and others have loopholes that can be exploited. Beeple's suggestion that creators must foster a following that cares about them and their art as much as they care about money should be at the forefront of your mind as you consider minting your next collection.

Hedera stands by its commitment to rewarding creators for their hard work. The Hedera network's on-chain custom royalties are secure, and the fallback fee provides an extra layer of safety for NFT creators. Hedera also offers low fees when minting, buying, or selling NFTs, so you don't have to worry about excessive costs discouraging people from buying your creations.