The future of recurring revenue: Understanding NFT royalties

NFTs have been making headlines as a new way to buy and sell digital art, collectibles, and other unique assets. 

But one of the most underutilized and misunderstood features of non-fungible tokens has somehow yet to make the waves that it should: Royalties. 

In the traditional art world, artists often receive a percentage of the sale price when their work is resold by collectors or auction houses. But they don’t typically see future profits from further sales. NFT royalties solve this by providing creators with ongoing income even after they've sold their original work. 

Both brands and individual creators will want to know about NFT royalties because:

• Brands will use them to capture new revenue streams from customers;
• Individual creators will use royalties to capitalize when selling directly to their fans.

In this blog, we'll explore how NFT royalties work, why they’re important, and how to use them to earn more from your NFT experiences.

How do NFT royalties work?

In simple terms, NFT royalties are payments designed to give creators a cut of all secondary sales from their digital collectibles. 

Typically paid out monthly or quarterly, the royalty percentage is set by you—the NFT creator—at the time of minting. The percentage is typically between 5% and 10%.

What’s the benefit of NFT royalties?

When you create and sell an NFT, you receive payment from the person who purchased your NFT. That’s a one-time payment like any other transaction. In the past, if a buyer turned around and sold that NFT, you wouldn’t see anything from it.

NFT royalties change that.

With NFT royalties, every time someone makes a secondary sale of an NFT you created, you get a percentage of that sale.

For example:

• Let’s say you give away one of your NFTs to a loyal fan named Marcus. Although you don’t get a primary transaction fee (because you made the NFT free), you still add a 5% royalty to the NFT.
• Marcus goes to a secondary marketplace like OpenSea and sells the NFT for .1 ETH. Your 5% royalty is taken out of that sale automatically.
• When Marcus’s NFT sells, he receives .095 ETH, and you, the creator, receive .005 ETH—or 5% of the sale.

You’ll get that royalty forever. No matter how many times Marcus’s or any other of your NFTs are sold.

That's what NFT royalties can do. Imagine a clothing store was able to track its clothes through their lifecycle. If the original owner sells on eBay, the clothing store will get a cut of that sale. Then the new purchaser sells it again, now on Poshmark.

How is this possible?

All of this is possible thanks to the NFT royalty protocol referred to as EIP-2981.

In short, EIP-2981 is a standardized way to retrieve royalty payment information for NFTs. It was co-authored by our CTO, James Seibel, to provide recurring rewards to NFT creators continually. Said it best by James himself:

“NFTs are unique in that the entire history of their activity is tracked in a perfect ledger - the blockchain. Through the power of smart contracts, the royalty can be encoded directly into the digital asset itself. This breakthrough technology is what enables royalties to be possible.”

Royalty vs. Service Fee

A royalty is different from a service fee.

If you’re familiar with NFT marketplaces, you’ve likely seen a “service fee” on NFT collections. If you haven’t, a service fee refers to the fee that secondary marketplaces charge to cover the cost of managing their platform.

That may look similar to a royalty on the surface, but it’s very different. For example, at the time of this writing, OpenSea—the most popular NFT marketplace—charges a 2.5% service fee. That means that they take 2.5% of the sales price for every transaction made on their platform. 

A marketplace service fee and the royalty are taken from the sales price—not added on top.

Why businesses should care about NFT royalties

In web2, brands sell a product, make money, and then return to work selling another product. If someone re-sells your product after the initial sale, you don’t receive any benefits from that secondary transaction.

That's not the case in web3, where secondary sales account for nearly $20 billion of all NFT transactions. With NFT royalties, your brand can capture a piece of those transactions—forever.

NFT royalties allow businesses to unlock an entirely new stream of revenue—that never dries up. This incentivizes companies and creators to create high-quality products that become desirable on resale markets.

For example, Nickelodeon web3 experience was one of the hottest NFT projects in the second half of 2022. The collection sold out almost immediately, bringing nearly a million dollars in new revenue to the team behind it. But here’s the kicker, Nickelodeon NFTs have reached almost $5.5 million in secondary sales volume.

Without royalties, the Paramount team that created those NFTs would have received zero benefits from those secondary sales. But luckily, Paramount chose to set up royalties on their Nickelodeon NFTs.

Why individual creators should care about NFT royalties

NFT royalties aren’t just a good way for brands to add to their bottom line. They’re also a complete game changer for individual creators.

This is important because to succeed in the near future, creators like musicians, artists, authors, and others will find success by selling their content directly to fans.

But as it stands now, for most creators, the royalty system works like this:

• A musician, author, or other creative signs a contract with a publisher or record label.
• In exchange for the publisher’s distribution network, marketing prowess, and promotional abilities, the creative gives up a large share of the revenue from their work—sometimes up to 85%.
• The creator gets a small portion of the revenue—referred to as royalties—often as low as 15%.

As you can imagine, this isn’t an ideal financial situation for creatives.

But things are changing. With membership platforms like Patreon, Buy Me a Coffee, and social media sites, creatives can showcase their work themselves and build a following of loyal fans with purchasing power. And with royalty-enabled NFTs, they can sell their creations directly to those fans.

With all these tools, creatives are also becoming better marketers than big publishers.

Embracing recurring revenue

NFT royalties are an exciting development in the world of digital goods, art, and collectibles. By allowing creators to earn ongoing income from the resale of their work, NFTs are creating new opportunities for partnerships and revenue streams, and are driving innovation in the digital space. 

Businesses that deal in NFTs, whether as creators or distributors, should be aware of the royalty structures we outlined, and consider them in their pricing and revenue projections. As the market for NFTs continues to grow and evolve, businesses that embrace this model will be well-positioned to reap the benefits of a more sustainable and equitable system for buying and selling digital assets.

Want to learn more? Check out our blog post on potential use cases for NFTs.