NFT Royalties

One of the most attractive features of Non-Fungible Tokens (NFTs) is the opening of new revenue streams for artists and creators, thanks to the rolling royalty structure enabled by the NFT technology.

Until today, artists and content creators would monetize only on their work’s initial sale. However, since NFTs are registered through smart contracts on a blockchain, the transactions associated to them are public, immutable, and traceable. This means that an artist selling its creations as NFTs (whether exclusively digital or as a digital tag associated to a physical asset) will now have a tool to track permanently who owns its works. As a result, by implementing rolling and permanent royalty payments (often a 5-10% fee) in the initial smart contract by which the artist sells its work to the first purchaser, the initial seller will be paid on each subsequent sale. In other words, this can and will open the doors to substantial passive income opportunities for content creators. Welcome to the creator economy: arguably one of the most fascinating novelties enabled by Web3 blockchain environments.

Once encrypted in NFTs, rolling royalty payments are executed by the smart contracts automatically and are auditable on a blockchain (typically Ethereum), and therefore neither creators nor subsequent owners have to worry about tracking down or chasing delinquent debtors.

NFT rolling royalty payments can be structured in different forms:

-       fixed: a constant percentage is generated on each sale;

-       decaying: a reduced percentage for each sale over time;

-       stepped: the royalty is not activated unless a certain threshold is met, which avoids generating royalties when NFTs are gifted;

-       multisig: royalties are sent in smart contract wallets managed by multiple signers. This is often for charity purposes or in the context of Decentralized Autonomous Organizations (DAOs).

However, it is important to point out that while NFT technology has all the native features to ensure that rolling royalty payments are implemented, creators and NFT holders should not assume that this is always the case. If the NFT is transferred to a platform other than the one where it was originally minted, the royalty payment might not be available because of the lack of interoperability between the two platforms. In this case, the creator would monetize only on the first sale.

Since we are still at early stages in the developments of NFT environments, most likely new solutions will streamline these types of operations. In this direction, the ERC-721 “Royalty Standard” within the “Ethereum Improvement Proposal” intends to create NFTs that pay royalties irrespective of the marketplace they are traded on, thus creating a widely accepted royalty protocol that can be used for different assets.