Understanding NFT Royalties and Optional Royalty Systems

What are NFT royalties?

NFT royalties refer to a portion of the sale price that is paid to the initial creator (artist, musician, author, etc.) of an NFT artwork each time it is resold on a secondary market. It is given to creators as a commission for the use of their non-fungible tokens. Typically, NFT royalties fall within the range of 5% to 10% on average. The purpose of these royalties is to guarantee that creators consistently gain from the appreciation of their artwork, even if it is resold by collectors.

How do NFT royalties work?

The royalty percentage can be set by the NFT’s original creator, or blockchain platform in the minting stage, depending on the blockchain and platform being used. Royalties are a key feature of many NFT marketplaces, which are embedded within the NFT’s smart contract and tracked on the blockchain. Whenever the NFT is resold on the secondary market, the smart contract will automatically calculate and execute the royalty payment to the initial creator’s cryptocurrency wallet. This bears resemblance to stocks being exchanged on the secondary market subsequent to their initial offering in an IPO.

For a long time, royalties have been a controversial topic in the NFT space. Many experts believe that the implementation of such royalties helps foster the sustainability of NFT marketplaces as it is a great source of passive and ongoing income for creators, incentivizing them to continue producing valuable content. Nevertheless, balancing between rewarding creators and ensuring a fair secondary market for collectors still remains the biggest challenge to NFT marketplaces as well as for creators when choosing the appropriate percentage of royalties. This caused marketplaces and NFT platforms to employ new royalty methods, such as optional.

What are optional royalties?

The optional royalty policy offers NFT collectors the option of deciding whether or not they wish to give creators a percentage of the revenue from NFTs’ sales. X2Y2 was among the first marketplaces to make creator royalties optional. The controversial approach was then embraced by Magic Eden, and LooksRare. OpenSea, the largest NFT market by trading volume, has also announced that they will stop imposing creator royalty fees on secondary sales of NFTs starting March 2024. How do optional royalties impact the sustainable development of NFT space?

What if NFT royalties become optional?

Making NFT resale royalties optional has its own pros and cons depending on different points of view. However, the move has left the majority of musicians and the NFT creator community unhappy. There are strong rationales behind the objection wave. Critics say optional royalties will first hurt artists, especially small ones, by disabling them to earn passive income from each resale of their work. The big promise of NFT, which used to be particularly attractive to emerging NFT artists, is now broken, discouraging them from participating in the marketplace. Besides, once the top player’s new royalty approach comes into effect next year, minor marketplaces will also be impacted, since NFT collectors might show a preference for platforms like OpenSea, which do not impose royalty collection.

Angola Team.

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