Most artists never see the value of their works. Instead, savvy collectors snap up their early works for pennies on the dollar. Only after appearing in galleries do these pieces increase in value – and unfortunately, that often happens years after an artist passes away. It’s a broken system that rewards collectors rather than creators.
Just as cryptocurrencies democratize transactions, non-fungible tokens (NFTs) aim to empower creators. The rise of NFT royalties enabled creators to generate recurring income from their creations, enabling them to double down on their creative endeavors and push the limits of their abilities. But now, these frameworks are at risk.
In this guide, you’ll learn how NFT royalties work and the struggle to keep them a part of the Web3 economy.
What Are NFT Royalties?
NFT royalties are a percentage of an NFT’s sale price the original creator receives each time it’s sold. So, for example, if an artist sells an NFT for $100 and sets a 10% royalty, they will receive $10 every time it’s sold in the future. Most creators set royalty rates of between 5% and 15%, enabling them to earn ongoing revenue from their work.
Before the introduction of royalties, creators only had few options for creating monthly recurring income. Projects that creators may have preferred remained “complete” after an initial collection are often diluted with second and third collections to provide ongoing financial support. As a result, many in the Web3 world viewed it as a lose-lose proposition.
How NFT Royalties Work
Ethereum’s EIP-2891 token standard set the stage for on-chain royalties. In short, the NFT’s smart contract contains the creator’s wallet address and royalty amount. OpenSea and other NFT platforms may handle royalties on-platform or use standards like EIP-2891 to bring them on-chain and enforce them across platforms.
Here’s an example of a Solidity contract implementing EIP-2891:
```
pragma solidity ^0.8.0;
import "@openzeppelin/contracts/token/ERC721/ERC721.sol";
import "@openzeppelin/contracts/interfaces/IERC2981.sol";
contract RoyaltyNFT is ERC721, IERC2981 {
uint256 private _nextTokenId;
address private _royaltyReceiver;
uint256 private _royaltyPercentage;
constructor(address royaltyReceiver, uint256 royaltyPercentage) ERC721("RoyaltyNFT", "RNFT") {
require(royaltyReceiver != address(0), "Invalid royalty receiver address");
require(royaltyPercentage > 0 && royaltyPercentage <= 10000, "Invalid royalty percentage");
_nextTokenId = 1;
_royaltyReceiver = royaltyReceiver;
_royaltyPercentage = royaltyPercentage;
}
function mint(address to) public {
_safeMint(to, _nextTokenId++);
}
function royaltyInfo(uint256 /*tokenId*/, uint256 salePrice) external view override returns (address receiver, uint256 royaltyAmount) {
receiver = _royaltyReceiver;
royaltyAmount = (salePrice * _royaltyPercentage) / 10000;
}
function supportsInterface(bytes4 interfaceId) public view override(ERC721, IERC165) returns (bool) {
return interfaceId == type(IERC2981).interfaceId || super.supportsInterface(interfaceId);
}
}
```Unfortunately, wrapped NFTs can circumvent these royalties. For example, someone can wrap the ERC-2981 token with an ERC-721 box and trade it through an ERC-721 smart contract. The new contract could affirm the transaction without royalties. ERC-2981 only works if all parties agree to use the same smart contract.
It’s possible to prevent wrapping by the movement of NFTs via a smart contract. For instance, you could prevent transfers between wallets and only allow transfers for a sale. However, people could still sell an NFT for a token value to bypass the royalty and execute a more significant transaction outside the marketplace.
These dynamics have left royalties up to marketplaces. While some marketplaces began strictly enforcing royalties, fierce competition has eroded these protections, and many marketplaces now have “opt-in” royalties. And others have forgone royalties altogether in favor of other compensation mechanisms, like a percentage of transaction fees.
What Platforms Support Royalties?
Many NFT platforms support royalties in some way, but the enforcement of royalties remains an open question.
OpenSea
OpenSea is the largest NFT marketplace in the world. After pioneering the idea of creator royalties, NFT traders began moving assets off-platform to avoid paying royalties on secondary sales. As a result, the platform began to see rising competition from royalty-free alternatives. So, OpenSea has experimented with everything from blocklists to opt-in royalties.
As of April 2023, OpenSea only mandates a 0.5% royalty fee for projects without on-chain enforcement while allowing sellers to pay more. The marketplace will also honor full royalty settings on all NFT projects created before January 2023 but only enforce royalties on new projects utilizing its on-chain enforcement tool.
Rarible
Rarible has been a strong supporter of creator royalties. Currently, royalties are fully respected on native listings made on Rarible or community marketplaces. Community marketplaces refer to listings made by a collection’s NFT holders directly – although powered by the Rarible Protocol – keeping transactions in the ecosystem.
The treatment of listings aggregated from third parties, like OpenSea or X2Y2, remains in flux. For example, Rarible charges the royalty percentage set by the collection owner on X2Y2. However, royalties aggregated from OpenSea are not enforced due to the OpenSea’s evolving stance on the treatment of royalties.
SuperRare
SuperRare, best known for its curated digital artwork, has doubled down on the concept of creator royalties. The platform automatically applies a 10% royalty to secondary market sales, although these royalties do not trigger when there’s a transfer, creating a potential loophole.
More interestingly, the marketplace pioneered the concept of collector royalties in 2021. After a successful 12-month pilot program, collector royalties apply to any artwork collected on SuperRare. These dynamics incentivize collectors to buy directly from artists in mint sales and identify valuable pieces with a high resale value.
Frequently Asked Questions
How do you check NFT royalties?
NFT marketplaces charge different royalty rates. For example, you can see the royalty rate on OpenSea by opening a listing and looking for the “Creator fee” that’s a percentage. And on Rarible, you can see royalty rates on the right side of a listing expressed as “Royalties.”
How do you calculate NFT royalties?
NFT royalties are expressed as a percentage of secondary market sales. So, for example, a 0.5% royalty means that the buyer would pay 0.5% of the total transaction value to the creator. Note that this is on top of any other transaction fees that may be incurred.
The Bottom Line
Non-fungible tokens have become a multi-billion dollar market, enabling creators to make a living and push the boundaries of their abilities. At the core, NFT royalties enable creators to extract value from their creations. But unfortunately, there are limitations to enforcing royalties on the blockchain, and popular marketplaces remain divided on the issue.
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