How NFT Royalties Work

What are NFT royalties?

NFT royalties are crypto payouts designed to proffer creators a cut of secondary sales of their digital collectibles. The percentage of sale designated for royalties is set by the creator at the time of minting — typically around 6%. Smart contract platforms where NFTs are minted are, in most cases, responsible for automating the payments.

The key to the success of revenue sharing lies in previous attempts to institute universal baselines for artist resale royalty rights. It explains why NFT royalties matter to the Web3 narrative and where the system currently falls short of its intended purpose.

Why artists need resale revenue

Artists have long struggled to find fair compensation. Artists such as Harvey Ball, famous for creating the yellow smiley face in 1963, was only paid $45 for his iconic image. The t-shirt company that used it later sold for $500,000,000 in 2000. And Robert Rauschenberg in 1958 sold his painting “Thaw” for $900. Just a few years later it changed hands for $85,000.

Once the intellectual property of both artists left the building, they lost all rights to downstream payments. That would not be the case if they had rights to royalty payments from secondary sales. 

Resale royalty rights are the legal entitlement to a percentage of proceeds made from selling an original artwork. The right is either granted by the state or a contract between the artist and reseller. And in the US, save for California, artists can only access this right through individual contracts.

In 2013, The United States Copyright Office reported that visual artists are at a unique disadvantage compared to other creators when it comes to revenue generation. 

Because the value of their art is derived from uniqueness, little money can be made from reproduction. The inherent nature of visual art excludes it from the type of royalty contracts between musicians, record labels and streaming platforms.

The music industry has its own set of challenges when it comes to fair compensation. The streaming model has cut artists out of a large share of royalties. Projects such as Blocktones have found creative ways to royalties into their music based NFTs.

Artists in the US have attempted to institute universal baselines for artist resale royalty rights through legislation, but each attempt has failed. And while some of these rights exist for Californians — and in some countries such as France — the requirements are easy to evade due to the lack of cross-border enforcement.

The ability to offer artists an easy system to collect royalties from NFT resales is what convinced many artists to enter the NFT market. Without royalties, the technology lacks an alternative to the artist’s monetization model.

How NFT royalties work

The NFT royalty system can differ between blockchains, but with Ethereum, it is managed at the discretion of smart contract platforms.

With Rarible, for example, the artist can set the percentage of resale proceeds at the minting stage via a smart contract on the blockchain in question. At the time of purchase, the platform automatically executes the terms of the contract. Platforms differ in the specifics of payout schedules.

The terms do not represent a legal contract, though — typically in a bid to sidestep litigation.

Case in point: Per Rarible’s terms of service, creators must agree to grant the platform royalty-free rights to any content posted on the platform. So, even though the platform embeds the terms of royalties via smart contract, there is no legal obligation.

The legalese transfers the enforcement burden from civil authorities to code. But, because the automation still requires consent from the market maker, a series of thorny enforcement challenges have emerged.