The NFT industry is full of buzz words and phrases. Even for an NFT veteran like me it’s hard to keep up.
One confusing phrase that raises a lot of questions is the concept of NFT Royalties.
We have all heard and understand the concept of royalties when it comes to music, but how do royalties work when it comes to NFT art?
NFT Royalties are a fixed percentage of a selling price of an NFT, paid back to the NFT creator, when the NFT is resold. If, for example, an NFT has a 10% royalty and resells for 3 Ethereum then 0.3 Ethereum will be paid to the NFT creator. This royalty is paid every time the NFT is resold.
As the full audit history of the NFT is stored on the blockchain, this royalty is paid to the creator automatically.
So, using this example of a 10% royalty, if an NFT sold on a secondary market, such as OpenSea, for 3 Ethereum then during this sale 3 Ethereum is paid by the buyer. 2.7 Ethereum is sent to the seller’s wallet and 0.3 Ethereum is sent to the NFT creators’ wallet.
Fortunately, this all happens in the background and without anyone needing to remember, or conveniently forgetting, to pay the royalties.
How NFT Royalties are Paid
This how process almost seems magical, and in the real world of ordinary trade, sales, and royalties, almost impossible.
So, how do NFT Royalties work?
During the creation (or minting) of an NFT a smart contract is used. A smart contract is simply a piece of code that is stored on the blockchain by the NFT creator and the instructions within the code are used every time the NFT is sold or resold.
Within this smart contract will be an instruction that if the NFT is ever resold – whether this is once or ten times or more – then a percentage of the selling price should be paid to the NFT creator, and instructions in the code of where the payment (Ethereum, Solana, Polygon etc…) should be paid to.
Therefore anytime, day or night, the NFT is resold on the open market through platforms such as OpenSea or Coinbase the smart contract is referred to as part of the sale and the funds from the sale are distributed as part of the contract.
NFT creators can wake in the morning to find more funds have been added to their wallet automatically overnight just through royalties.
It’s an incredibly reliable process and helping artists and crowdfunded ventures make a further income for potentially years to come.
The smart contract does not expire, and records on the blockchain are never deleted, so if the NFT sold in 20 years-time the royalty will still be paid to the creator.
Why are Royalties paid on an NFT Sale
Royalties are paid on an NFT sale simply because this is common practice and has been since the launch of NFTs, plus with smart contracts and automatic royalty transactions the NFT creators found a way of earning additional revenue with little to no effort.
To see how profitable NFT royalties can be to an NFT founder, let’s look at a real-life example.
The Moonbirds NFT Collection was the most anticipated NFT collection launch in 2022. It quickly sold out and has been selling for a very high watering sum.
The cheapest Moonbird NFT today is 31 Ethereum ($93,682 as of today), and as you can also see in the screenshot below, there have been 104,500 Ethereum traded on the secondary market for Moonbirds.
This is equal to $315,000,000 (yes, $315 million) traded on Moonbird NFTs!
The NFT royalty set on Moonbird resales is 5%, which means the creators have earned an additional $15,750,000 just through secondary sales alone.
Each Moonbird NFT cost 2.5 Ethereum to buy, and the collection sold 10,000 of them.
This means collectively the Moonbird creators have earned $91million, which is $75.5m through the launch of the collection and $15.75m in Royalties.
We can also see that although the NFT Royalty is set at a modest 5%, the amount earned through NFT royalties is 20% of the overall revenue.
The royalty value will only grow as more and more trade happens on the secondary market, and over the next year or two the royalty value could be greater than the original $75m in sales.
This is why NFT royalties are so important to NFT creators and provides a long-term revenue stream.
How much are NFT Royalties
NFT creators can set the royalties on their NFT collection to any value they choose, so every collection you may see something different.
Some NFT creators, particularly artists, allow people to mint an NFT from their collection for free (where the buyer simply pays the gas fee to create the NFT in the collection).
The artists hope they make enough through NFT royalties in secondary sales, and in such cases the royalties may be slightly higher than usual.
Almost always the royalties on an NFT will range between 5% and 10% of the selling price.
Moonbird could easily have added a 10% royalty to their collection, and by now they would have earned $31.5m in royalties rather than the $15.75m they have – but I am sure they are happy with their $91m for selling 10,000 images of cartoon owls!
Can anyone add Royalties to their NFT Collection
Anyone who creates an NFT can add a royalty percentage to be paid back to them on future resells.
The royalty is stored in the smart contract and can be set by the creator, but once set in the blockchain it cannot be changed.
This makes sense because it wouldn’t be fair if a creator could go and secretly change their 5% royalties to 50% royalties after the initial sale (or mint) has happened.
It’s important to make sure your royalty amount, and the wallet the royalty is paid in to is correct, as it can not be changed once the smart contract is held in the blockchain and has been used to create or mint the NFTs!