How Do NFT Royalties Work?

Royalties are a percentage of revenue earned based on secondary market sales. NFT-based royalty payments empower creators to earn money from a song, artwork, or creation after an initial sale. Content creators are increasingly building royalty fees into smart contracts connected to work to partake in future sales.

It’s easy to see the appeal. Artists can receive a kickback from the sale price each time a work is sold. I mean, imagine if da Vinci had a stake in his work on the resale market.

But NFT royalties have implications beyond NFT marketplaces, and secondary sales can benefit innovative companies like they do original creators.

In this article, we’re going to start with a primer on what NFT royalties are. Then we’re going to discuss why they matter to the enterprise. We’ll finish with a quick brainstorm of ways to apply the technology to grow your business.

What Are NFT Royalties?

Non-fungible tokens, NFTs, are unique assets minted using blockchain technology. Anything in the real-world can be represented as a digital asset, but here we’re talking about digital things that are verifiable, trackable, and limited. The whole idea of NFTs is that they’re one of a kind.

This has made NFTs attractive to digital artists because they can create a piece of work, verify its authenticity, and sell it online.

Royalties are programmed into the NFT via smart contract. A smart contract allows us to trigger a transaction based on certain criteria. Here, we can trigger payments back to the original creator each time an NFT is sold.

The structure of the royalty is up to the person or company that mints the NFT. It can be a flat fee, paid each time an item is sold, or a percentage of the sale price. The possibilities here are endless, and this flexibility is an attractive way to open new streams of revenue.

A good example is the Bored Ape NFT collection where the creators, Yuga Labs, receive 2.5% of each sale as a royalty.

How Can Business Use NFT Royalties?

NFT royalties are a way to profit from subsequent sales. This has clear value to makers who want to control their work on the web, especially as we think about issues with rights and ownership as items are downloaded, shared, and copied. But how can enterprises put NFT royalties to work to win customers and stand out in the market?

Attract creators

Companies want to partner with makers to promote their business. NFT royalties offer a new tool they can use to attract and reward creative talent. This can give enterprises a leg up when it comes to attracting people with built in audiences.

Whether we’re talking about a media company that offers artists a new way to monetize art or a company that wants to partner with an artist to create NFTs for promotional purposes, smart contract-powered royalties are a new tool for doing business.

Create stickiness with users

NFT royalties don’t have to reward only the creators. Say you’re a large company issuing an NFT. Your goal is to gain attention and remain top of mind. NFT royalties can encourage people to share, as a contract can trigger a reward to the first buyer when a second person buys the NFT, and so on. Allowing individuals to share in the success, reach, or virality of a campaign is a great way to create stickiness in the market.  

Open revenue streams

Goods for money is the old way of doing business. A product was sold and if a consumer decided to sell it later the company that made the product had no part in that secondary sale. The NFT space gives companies  a new way to do business. Using blockchain, smart contracts, and NFTs a company can profit from the full lifespan of a digital product.

Might this ability to share in secondary revenues encourage companies to create longer lasting, quality products? Planned obsolescence could be a thing of the past if the goal is to encourage recirculation of goods.

Increase collaboration

NFTs in the gaming space get a lot of attention. A brand can issue a character, accessory, or reward as an NFT and retain a measure of ownership if that item is resold. But NFT royalties and the control that smart contracts allow encourage a more collaborative market. What if gamers were encouraged to use a platform to mint assets of their own design and the resale of those assets made payments to the platform? We also wrote about a play-to-earn platform where drivers, fans, and a platform share in value gained by game-won NFTs.

NFT royalties make decentralization less about separating and siloing, and more about finding unique ways to share in the value of ideas.

Final Thoughts

In all the examples we discussed questions can arise around intellectual property. Some of these questions can be answered via smart contract at the time of minting. We also need to think about tax implications, as future proceeds might be handled as capital gains. Then we need to consider how the partial ownership of a digital asset is transferred in a will.

There are plenty of questions left to answer. But I hope what we’ve conveyed here is that all these questions pale in comparison to the potential of NFT royalties to open new income streams, empower creators, and better engage increasingly distracted consumers.