NFT Royalties

NFT royalties are fees paid to the original creator of a non-fungible token each time it is resold on a secondary market. The creator chooses a rate, commonly between 2.5% and 10% of the sale price, and the marketplace handling the trade deducts that share and sends it to an address the creator controls. The idea was one of the main selling points of NFTs for artists, musicians and game studios, because it promised ongoing income from work that rises in value after its first sale.

In practice, royalties are a convention between creators and marketplaces rather than a guaranteed feature of the token itself. A basic NFT standard such as ERC-721 records who owns a token but does not force anyone to pay a fee when it changes hands. From 2022, competition between trading venues turned royalties into one of the most argued-over questions in the NFT market, and several platforms made them optional for buyers.

Imagine a painter who sells a canvas for a modest sum and watches it resell years later for many times the price. In the traditional art world the painter usually earns nothing from that resale. NFT royalties try to fix this by attaching a small, standing instruction to the digital work: "whenever this is sold again, send a slice to the artist."

The catch is that the instruction is only as strong as the shops that respect it. If one marketplace honours the slice and another lets buyers skip it, traders can simply move to the cheaper venue. That is why royalties have moved from being a promise to being a matter of marketplace policy and, increasingly, of how the token's code is written.

When a creator mints a collection, they set a royalty percentage and a payout address. There are two main ways this information reaches a marketplace:

• Platform settings. Early marketplaces such as OpenSea stored royalty settings in their own databases. A creator entered a rate in a dashboard, and the marketplace applied it to every sale it processed.
• On-chain signalling. The Ethereum standard EIP-2981, finalised as part of the Ethereum Improvement Proposal process, adds a function that lets any marketplace ask the token contract what royalty to pay and to whom. It signals the amount but does not enforce payment.
• Enforced transfers. Newer designs restrict who can move a token, so that only approved marketplaces that pay royalties can transfer it. Examples include the ERC-721C approach on Ethereum and programmable NFTs on Solana.

The royalty is taken from the seller's proceeds, so the buyer pays the listed price and the seller receives the price minus the marketplace fee and the creator's share. Payments are made in the currency of the sale, usually ether or a token such as a stablecoin.

Late in 2022, newer marketplaces competing for traders began to make royalties optional or to pay only a small minimum. Professional traders, who buy and sell frequently, welcomed the lower costs. Many creators objected that the change broke the bargain that had attracted them to NFTs in the first place.

OpenSea first responded with a tool that let creators block sales on marketplaces that ignored fees, then announced in August 2023 that it would retire that tool and make creator fees optional for new collections. The episode showed that a royalty written into a project's marketing is not the same as one written into its smart contract, and it pushed developers toward enforcement at the token level.

Royalties are used wherever a creator wants a share of future trading:

• Music. Artists have used NFTs to sell limited editions or rights-linked collectibles, covered further under NFTs in the music space.
• Games. Studios can earn a fee whenever players trade in-game items, a model discussed under NFTs in gaming.
• Profile pictures and collections. Large avatar projects, often called PFP NFTs, have funded their teams partly through resale fees.

For creators in the wider creator economy, royalties are one of several revenue tools, alongside primary sales, memberships and licensing.

Royalties depend on trading volume, so income falls sharply when the market cools, as it did during the crypto winter that followed 2022. Enforcement methods that restrict transfers can also limit what owners do with their tokens, such as moving them between wallets or using them in other applications, which some collectors see as weakening ownership. Royalties do not normally travel across chains: an NFT bridged to another network may lose its fee settings. Finally, a royalty is a contractual or technical arrangement, not a copyright licence, so buying an NFT that pays royalties does not by itself give the buyer any rights to the underlying artwork, and the tax treatment of royalty income varies by country.

• EIP-2981: NFT Royalty Standard