In this article, we will explain the link between NFTs and royalty payments, namely, how valuable royalty payments can be for the creators behind these collections – touching on the hurdles that need to be overcome, and why NFT royalties may be more complicated than they seem. By the end of this article, you should have a basic understanding of the landscape of NFT royalties and the roadmap moving forward.
There is no simple method for distributing royalties in sectors like music or communications. To get payments to the artist, streaming platforms and middlemen typically have to go through a number of formalities. Naturally, this not only requires fees that are often paid for by the artist. Adding to this inconvenience, the process itself takes an unnecessarily long time. Let’s look at how NFTs claim to help with this issue.
The Basics
In essence, every time your NFT creation is sold on a marketplace, NFT royalties offer you a portion of the sale price. NFT royalties are permanent and automatically carried out via smart contracts. You can select your royalty proportion on the majority of online marketplaces. A typical royalty is between 5-10%.
The NFT royalties are payments provided to the creator on secondary sales that are made automatically. These are included in the blockchain’s smart contract code. The smart contract makes sure that the NFT’s conditions are met each time a secondary sale takes place. The artist who developed them receives a portion of the income if a royalty is stipulated.
There is no need for middlemen, and the wishes of the party carrying out the transaction are not relevant. Please note that not every NFT generates royalties. It must be expressly stated in the terms. The rest is handled automatically once the blockchain has the terms of the smart contract recorded.
The Problem
Traditionally, the underlying smart contract of an NFT indeed promises to offer the inventor more control, but the reality can be different. The expectation of creators is that they will always get their fair portion of royalties when their NFT is flipped, although this isn’t always the case.
The fact that multiple markets are not made to work with one another is the NFT market’s largest issue. Peer-to-peer transactions are permitted by smart contracts, but they are unable to communicate with one another across various blockchains.
Consider a scenario where a creator produces his NFT and sells it to a customer. He will be compensated for this initial sale. However, the creator receives nothing from the transaction if the customer lists this NFT on another marketplace and sells it there.
Alex Salnikov, chief strategy officer and co-founder of NFT marketplace Rarible, said to TechCrunch, that every platform had royalties about a year ago. Then half a year passed and some marketplaces stopped implementing them. This is problematic for creators.
Creators of an NFT currently get a royalty that is based on the marketplace where the NFT was first issued. There is a good chance that the creator won’t receive royalties from every subsequent sale because they cannot prevent the buyer from listing the NFT on other marketplaces.
Combating the problem
Universal Token Standards. Put simply, if all NFT Marketplaces adopt and agree on these shared token standards, then creators of the listed NFTs can get their royalty cuts irrespective of where the NFT is being sold. To achieve this, we need interoperability between blockchains – being frank, this is likely not going to happen for a while, at least unit the whole industry has matured and the competitive forces driving the industry have settled.
The scope for the future
NFT royalties promised a simple and trouble-free way to continue making money from your passion project. With NFT royalties, artists, game developers, and content producers hoped to profit from secondary sales in a way that was never before possible.
The truth behind this, however, is that marketplaces (in theory) could withhold royalty payments simply because they have the ability to do so. Although it doesn’t make sense to withhold royalty payments from creators, as this will turn creatives away from the said marketplace, and that’s bad business.
In some ways, it looks like we are coming full circle. The ethos behind NFTs was to cut out middlemen so that creatives, artists and NFT enthusiasts alike could have a fully decentralized platform to work with, giving them their credits where credits are due – in this case, paying them their rightful commission.
It is important to remember that the whole Web3 industry is rather new, so maybe applying some patience is the key here. In such a short while, we have seen massive advancement in terms of its technological utility, so we are certain there is a lot more to come.