A Creator's Guide to NFT Royalties

For digital artists and creators, the promise of automatic, on-chain royalties represents a significant shift in how they can benefit from their work. Traditionally, visual artists often missed out on the profits generated from secondary market sales. For instance, a painter might sell a canvas for a certain amount, only to see it resold for a much higher price years later, without receiving any of that increased value. NFTs, using smart contracts, introduced a solution: coding a royalty fee directly into the token, allowing the original creator to earn a percentage from each future sale indefinitely.

This concept fueled the NFT boom of 2021, enabling artists to build sustainable careers. However, the reality of NFT royalties has proven to be more complex. The ongoing debate regarding royalty enforcement has placed artists in opposition to marketplaces and collectors, raising essential questions about decentralization, compensation for creators, and the fundamental nature of digital ownership.

This guide explores NFT artist royalties. It addresses how they function, the technical standards that support them, the conflicts arising around them, and the current state of the ecosystem. Understanding these nuances is vital for artists launching collections or collectors aiming to support creators.

How NFT Royalties Function

The fundamental concept behind NFT royalties is straightforward. When an artist mints an NFT, the smart contract governing the token includes specific parameters.

1. The Royalty Standard: The contract identifies a royalty percentage and specifies the creator's wallet address for fund distribution.
2. Marketplace Integration: When the NFT sells on a secondary marketplace, such as OpenSea or Blur, the marketplace's smart contract retrieves the royalty information from the NFT's contract.
3. Automatic Payout: Once the sale concludes, the marketplace's contract splits the payment, sending the majority to the seller and the royalty fee directly to the creator's wallet.

In theory, this process is transparent and automated, enforced by the immutable logic of the code. It eliminates the necessity for trusted intermediaries, ensuring creators receive compensation for the long-term value of their work.

The Technical Standard: EIP-2981

To enable royalty payments across the ecosystem, a common standard was essential. This standard, known as EIP-2981: NFT Royalty Standard, is an Ethereum Improvement Proposal that outlines a new feature for the Ethereum ecosystem.

EIP-2981 introduced a universal function that any NFT contract can implement:

function royaltyInfo(uint256 _tokenId, uint256 _salePrice) external view returns (address receiver, uint256 royaltyAmount);

Breakdown of EIP-2981

• Any marketplace can invoke the royaltyInfo function on an NFT contract.
• The marketplace passes the ID of the token being sold (_tokenId) and the sale price (_salePrice).
• The function returns two values:
• receiver: The Ethereum address designated to receive the royalty payment.
• royaltyAmount: The precise royalty fee to be paid.

This standard marked a significant advancement. It provided a reliable method for any marketplace to discover and calculate the correct royalty for any NFT implementing the standard, eliminating the need for custom integrations for each project.

Challenges: Non-Enforceability of Royalties On-Chain

The crux of the conflict lies in the fact that the EIP-2981 standard, along with similar methods, is voluntary. The core ERC-721 NFT standard does not mandate the transfer of royalty fees.

Consider it like this: While the NFT contract may display a sign reading, "Please pay the artist," it cannot compel the buyer or seller to make that payment. Enforcement of royalties relies entirely on the marketplace where the transaction occurs.

During the NFT bull market of 2021, this wasn't a significant issue. Major marketplaces such as OpenSea, SuperRare, and Foundation honored the EIP-2981 standard and adopted a creator-centric model that incorporated royalty payments.

Emergence of Zero-Royalty Marketplaces

The scenario shifted dramatically in 2022 as market conditions cooled and competition among marketplaces intensified. New platforms emerged, seeking to capture market share by offering reduced fees to traders. The most straightforward fee to eliminate was the artist's royalty.

• Advocacy for Optional Royalties: Supporters of this model argue that enforcing royalty payments contradicts the Web3 principle of true ownership. They contend that if an individual truly owns an asset, they should have the freedom to sell it on any terms, without the artist imposing a fee. They perceive royalties as a tax rather than an inherent aspect of the asset.
• Marketplace Response: Platforms like SudoSwap and X2Y2 introduced options that made royalties optional or set to zero by default. The most impactful shift occurred when Blur, aimed at professional traders, launched with an optional royalty model that incentivized traders to minimize fees.

This created a competitive environment where traders flocked to zero-royalty platforms to maximize profits, leading to a decline in creator royalty revenue. OpenSea, a proponent of creator royalties, had to introduce optional royalty tools to remain competitive within this evolving market.

Current State of NFT Royalties

The NFT ecosystem now exists in a fragmented state. There is no universally accepted approach to royalties. However, several models have emerged.

Model	Description	Pros	Cons
Voluntary	Collectors decide whether to honor creator royalties.	Upholds ownership principles; lower fees for traders.	Detrimental impact on creator income; unreliable.
Allowlist Enforcement	NFT contracts restrict transfers to marketplaces on a royalty-honoring allowlist.	Increased creator control; effective royalty enforcement.	Seen as anti-decentralization; requires list maintenance.
Community and Brand	Creators build a loyal community that voluntarily supports royalties.	Aligns incentives; builds long-term value.	Challenging to establish; relies on social pressure.
Evolving Standards	New token standards aim to enforce royalties more effectively.	Potential for strong technical solutions.	Requires broad adoption by wallets and marketplaces.

Voluntary Model

The voluntary model is currently the dominant approach in the NFT market. Marketplaces allow collectors to choose whether they will pay the suggested creator royalty.

• Advantages: This model respects the principle of true ownership and results in lower fees for traders.
• Disadvantages: It significantly harms creator income and lacks reliability.

Allowlist Enforcement Model

Allowlist enforcement involves embedding code in the NFT contract that restricts transfers to marketplaces that commit to honoring royalties.

• Advantages: This model grants creators greater control and can effectively enforce royalty payments.
• Disadvantages: Critics argue it undermines decentralization and requires ongoing maintenance.

Community and Brand Model

In this model, creators focus on building a passionate community that wants to support them and willingly pay royalties.

• Advantages: This approach aligns the interests of creators and collectors, building long-term value.
• Disadvantages: It can be difficult to achieve and relies heavily on social dynamics rather than contractual obligations.

Evolving Standards Model

New token standards are emerging that aim to integrate royalty enforcement more deeply into the token’s logic.

• Advantages: Such standards could offer a more reliable technical solution for royalty payments.
• Disadvantages: These changes require extensive adoption by wallets and marketplaces to be effective.

Strategies for Creators

Artists planning an NFT launch must move beyond the outdated "set it and forget it" mentality regarding royalties. A proactive and informed strategy is essential.

1. Implement EIP-2981: This remains the foundational step, clearly indicating your desired royalty structure.
2. Select Your Marketplace Strategy: Decide if you will use a contract that enforces an allowlist. Be aware of the benefits and drawbacks of this method and its potential community perception.
3. Cultivate a Strong Community: Building a community of dedicated fans who appreciate your work is important. A strong community can encourage collectors to honor royalties.
4. Offer Utility: Provide NFT holders with benefits beyond the artwork itself, such as access to exclusive content or private forums. When NFTs offer ongoing utility, collectors are more likely to prioritize the creator's ecosystem.
5. Educate Your Collectors: Clearly communicate your royalty policy and explain its importance for your sustainability as a creator.

The debate over NFT royalties continues, reflecting the growing pains of the Web3 ecosystem as it seeks to balance absolute ownership with sustainable creator economies. While the initial vision of automatically enforced royalties faces challenges, the ongoing conversation prompts a more mature and careful approach. Creators can manage this field by combining technical standards, community engagement, and transparent communication.