Royalties are payments made by one party to another for the use of their assets. This term is commonly associated with the music industry, where artists allow their recordings to be played on the radio, streamed online, or used by other musicians in exchange for a fee.
Not just musicians can earn royalties; anyone involved in creative productions, such as songwriters, publishers, composers, producers, and novelists, also has the right to receive them.
However, the current royalty payment system has many problems. A 2015 study conducted by Berklee found that 20 to 50% of music royalty payments fail to reach their intended recipients.
Traditionally, after the first sale, the artist or creator had no way of tracking subsequent sales of their work. Once they sold their work, that was the end of their earnings from that piece of work. Regardless of how famous they have become over the years, they stand to gain nothing from previous sales of their works.
On the other hand, buyers can sell the same work at exorbitant prices if they wait for the right moment. As a result, the artists receive nothing from subsequent sales, no matter how high the price. As a result, many people associate artists with poverty or starvation.
NFTs have created opportunities to change this completely. With NFT royalties, artists can receive a fair share of the proceeds from their creations. They can add royalty percentages at the time of creation, which are executed every time the creation is sold.
This innovative approach has inspired many artists and content creators to venture into the NFT space. For example, rap icon Eminem released the Shady Con NFTs on Nifty Gateway, featuring collectibles like trading cards, comic books, and original beats. Ellen Degeneres and Paris Hilton auctioned NFTs and contributed significant funds to social causes.
How NFT Royalties Work
Just like regular royalties, NFT royalties are payments made to the original creator whenever their digital asset is sold on the secondary market. The creator determines the percentage of each sale that will be paid in royalties. While no specific requirement exists, the average royalty is typically around 6% in the NFT space.
However, unlike regular royalties, NFT royalties are paid to the creator immediately after the sale is completed. The royalty payment is tracked using a blockchain and encoded in a smart contract accompanying the NFT. When a secondary sale occurs, the smart contract ensures that the terms of the NFT are met. If a royalty is specified, the artist who created it receives a portion of the profits.
This eliminates the need for intermediaries and is independent of the preferences of the transacting parties. It’s important to note that not all NFTs inherently generate royalties; this must be explicitly stated in the terms, with the smart contract managing the remainder automatically once terms are inscribed into the blockchain.
Currently, NFT royalties are limited to NFT assets and their associated ecosystem. The structure of royalty systems varies across different marketplaces, including differences in payout schedules. For example, OpenSea, the largest NFT marketplace, illustrates this mechanism well.
OpenSea, the biggest NFT marketplace, provides a good illustration of how the mechanism works.
When creators mint NFTs on OpenSea, they have the option to set a royalty fee, often a percentage of the sale price, ranging between 0% and 10%. Upon minting, anyone can purchase the NFT.
In the event of a resale for a higher value, the creator receives a portion of the additional proceeds. For instance, if a creator sets a 10% royalty fee on their NFT initially sold for 1 ETH, and the buyer later sells it for 2 ETH, the creator would receive a royalty fee of 0.1 ETH (10% of the seller’s 1 ETH profit), leaving the seller with 1.9 ETH.
Benefits of NFT Royalties
The primary beneficiaries of NFT royalties are artists and creators, providing them with a means to sustain their production of high-quality work and receive fair compensation. Several key advantages of utilizing NFT royalties include:
NFT Royalties Democratize the Payment Process
NFT royalties revolutionize the payment process, enabling artists to earn consistently from secondary sales of their work. This shift ensures that artists, just like renowned sports figures, are fairly compensated for the ongoing popularity of their creations.
No Transfer of Underlying Copyrights
Unlike traditional transactions, NFTs allow tokens to be sold without transferring the fundamental copyrights to the new owner. This unique feature empowers creators to maintain control over their work while selling a portion of their rights to others. The new owners are entitled to receive royalties generated from the NFT, although this feature is subject to availability on the chosen marketplace.
Income Generation Beyond Token Possession
NFT royalties offer an avenue for artists to generate significant income from their work even after they have lost possession of the creation. Through the tokenization of the creation, artists gain the ability to continue earning from secondary sales and share royalties with investors.
This approach replaces the outdated system where middlemen and businesses profited while the artists struggled with a fairer and more equitable model.
Are NFT Royalties the Answer?
While NFT royalties offer significant advantages for artists and creators by providing a streamlined way to earn ongoing royalties from their work, there are valid concerns that they may not be the complete solution for fairly compensating creators.
One major issue is the rise of marketplaces allowing optional or zero royalties. Giving buyers the choice to pay reduced or no royalties at all undermines the entire premise of using NFTs to ensure fair, automated royalty payments to creators. If this trend continues, artists may once again find themselves struggling to receive their rightful compensation from secondary sales.
Additionally, the tax implications of NFT royalties are still being explored, especially because of the potential complexities they create. Treating royalties as capital gains could lead to high tax burdens in some cases. There are also uncertainties around transferring NFT royalty rights via legal instruments like estates that need to be addressed.
From a technical standpoint, understanding and navigating blockchain transactions, smart contracts, and NFT platforms requires a level of technical knowledge that could create accessibility barriers, especially for less tech-savvy artists and creators. This could prevent some from fully capitalizing on NFT royalties.
Furthermore, while NFTs enable creators to retain core copyrights to their work, questions remain about how those rights will be enforced and protected, especially across international jurisdictions with varying IP laws. Illegal duplications could proliferate and undermine the scarcity and value of legitimate NFT works.
In conclusion, while NFT royalties represent an innovative model with transformative potential for the creator economy, there are still significant challenges and open questions that must be addressed through ongoing refinements to the technology, clearer regulations, and improved accessibility. NFTs alone may not be the singular, all-encompassing solution to ensuring fair, sustainable compensation for artists and creators.
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