NFTs have quickly taken the world by storm and redefined the concept of ownership. For the first time in history, it is easy to track ownership.
The entire history of a token is safely encoded in the blockchain, ensuring that the original creator is always credited. The nature of NFTs makes them very compatible with the concept of royalties. But what exactly are NFT royalties?
NFT royalties refer to payments made to the original creator for every secondary sale of their digital assets.
The original creator can receive a percentage of the sale price as a royalty. Many works appreciate in value over time, and royalties allow creators to profit from them even after the initial sale.
How do NFT royalties work?
The most important aspect of NFT royalties is the popular marketplaces, such as OpenSea or Rarible.
Choosing a platform is important if you plan to set royalties for your NFTs, as they all have different policies.
There are two main ways to handle royalties:
Including them in the smart contract governing an NFT.
Negotiating the royalty percentage directly with the buyer upon the sale of an NFT.
If you decide to set the royalty percentage when you mint your NFT, it will be encoded into the smart contract. As a result, after every sale, your royalties will be automatically calculated and distributed to you.
The percentage of the royalty can vary depending on the terms of the NFT contract, but it is typically set between 5-15%. This percentage is taken from the sale price and sent to the creator. For example, platform Rarible sets a default percentage for royalties at 10%.
For example, let's say an artist creates a piece of artwork on Rarible and sets the royalty percentage at 10%. His fan decided to purchase it for 1 ETH. An artist’s popularity has increased since then, and his artwork has gained recognition. Said fan decided to put the NFT on sale and set a price at 10 ETH, for which it was sold.
Since 10% royalties were applied, artist will receive 1 ETH from this transaction (10% of 10 ETH), as a royalty payment.
Each NFT marketplace has its own rules regarding royalties.
For example, up until 2023, OpenSea, one of the most popular NFT marketplaces, offered creators a royalty fee of 2.5%. In 2023, the company made creator royalties optional and changed their minimum percentage to 0.5%.
This means that buyers on OpenSea are not obligated to honor the creator's royalties, and artists should take this into account when deciding which platform to use.
Besides OpenSea, LooksRare, MagicEden and X2Y2 all moved to the “optional royalties model”.
How to set NFT royalties?
Creation of NFTs and corresponding smart contract
The first step is of course, creating an NFT and minting it on the blockchain (like Ethereum or Binance Smart Chain). NFT is assigned a unique code that gives it a distinctive value and ensures its non-replicability. This code is embedded in the blockchain.
Once the NFT has been created, the respective smart contract must be assigned to it, which will allow to set up the parameters and collect royalties.
Setting the Royalty Percentage
As mentioned, the royalty percentage can vary from 5% to 15% and is written into the previously created smart contract, ensuring transparency and immutability.
The first sale of our NFT and secondary sales
Sell your NFT for a certain price on a marketplace of your choice.
When a buyer acquires your NFT and opts to sell it, your royalties will perform seamlessly. The formula is executed automatically when an NFT is sold on a secondary market.
The smart contract calculates the royalty based on the sale price and our set percentage and automatically sends the corresponding amount to the creator's wallet. Each time an artist's NFT is sold on the secondary market, this process occurs in the network or is negotiated with the buyers upon the initial sale.
Is it Possible to Transfer Royalties?
Yes, it is possible to transfer NFT royalties. If the original creator wishes to transfer the royalty rights to someone else, this can be done through the smart contract.
The relevant smart contract should be modified to designate a new recipient for the royalty payments, or to transfer the royalty rights separately from the NFT itself.
Why are royalties important for creators?
Many works of art increase in value over time. Some of the world's most expensive paintings were purchased for hundreds and now are sold for millions. With royalties, artists can benefit from their intellectual work even after transferring rights to their artworks.
For example, Beeple's artwork "Everydays: The First 5000 Days" sold for 38,525 ETH (equivalent to US$69,300,000).
With pre-set royalties, the artist will continue to benefit from the work each time it changes hands. In this way, royalties can become a source of passive revenue for artists.
In the world of NFTs, royalties represent a pre-set percentage of the sale that is transferred to the original creator. Payments are made to creators for each use or sale of their work.
Royalties can be specified in the smart contract on the blockchain network or negotiated with buyers upon the initial sale.
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