What are NFT royalties, and how do they work?

Non-fungible tokens (NFTs) are a type of digital asset that can represent ownership of unique items, such as art, music, or in-game items. One of the unique features of NFTs is the ability to distribute royalties from resales. This means that the creator of an NFT can receive a percentage of the sale price every time their NFT is resold on the secondary market.

How do NFT royalties work?

NFT royalties work through the use of smart contracts. Smart contracts are self-executing contracts that are stored on the blockchain. When an NFT is minted, the creator can specify a royalty percentage that they will receive whenever their NFT is sold. This percentage is then hardcoded into the smart contract.

When an NFT is resold on an NFT marketplace, the smart contract will automatically deduct the royalty percentage from the sale price and send it to the creator. The royalty percentage is typically paid out in the same cryptocurrency that was used to purchase the NFT.

What are the benefits of NFT royalties?

NFT royalties offer a number of benefits for creators, including:

Sustainable income: NFT royalties allow creators to continue earning income from their work, even after the initial sale. This can be a valuable source of income for creators, especially if their work becomes popular and is resold multiple times.

Fairer compensation: NFT royalties can help to ensure that creators are fairly compensated for their work. In the traditional art world, it is often difficult for creators to track the resale of their work and collect royalties. NFT royalties make it easier for creators to track the resale of their work and receive the royalties they deserve.

Increased liquidity: NFT royalties can increase the liquidity of NFT markets. This is because buyers are more likely to purchase an NFT if they know that the creator will receive royalties from future resales.

What are the drawbacks of NFT royalties?

NFT royalties also have some drawbacks, including:

Technical complexity: NFT royalties can be technically complex to set up. Creators need to understand how smart contracts work in order to create an NFT with royalties.

Legal uncertainty: The legal status of NFT royalties is still uncertain in many jurisdictions. This could make it difficult for creators to enforce their royalty rights.

Opportunity cost: Creators who choose to receive royalties from NFT resales are giving up the opportunity to sell their NFTs outright. This means that they may miss out on a larger profit if the value of their NFT increases significantly.

Conclusion

NFT royalties are a powerful tool that can help creators to earn a sustainable income from their work. However, there are also some drawbacks to NFT royalties, such as the technical complexity and legal uncertainty. Creators should carefully consider the pros and cons of NFT royalties before deciding whether or not to implement them.