What Are NFT Royalties?
NFT royalties are automated payments made to the creator of the token whenever a resale of the token takes place. The creator determines the percentage royalty before the token is minted, and this fee is coded into the smart contract which will exist into perpetuity.
Royalties are one of the main reasons why creators are encouraged to tokenise their work as they provide a means for revenue generation that hasn’t previously been possible for creators. For example, a musician can earn from every secondary sale of his/her album, rather than only just the initial sale of the album.
This provides greater incentive for creators of all kinds as their work will consistently create income, whether past or new work. Royalties have created immense opportunities for creators, and they can become less reliant on the large companies who distribute their work.
How Do Royalties Work on a Marketplace Level?
As mentioned, the royalty percentage is determined by the original creator on the marketplace before the token is minted. The creator of the token then earns this percentage after every resale that takes place.
There is however one problem when it comes to implementing royalties, and that is that they’re only enforceable on a marketplace level and not on-chain. The royalties may only apply on the marketplace where the token is minted, a potential flaw in today’s NFT token contract standard.
This means that there are methods for collectors and traders to avoid paying the royalty fee, maximising their earnings on sales of the token. Token trades can be made OTC (over the counter), and several marketplaces have now introduced optional royalties, giving the seller the choice on whether to pay royalties or not.
Why do marketplaces make royalties optional? Well, this type of marketplace is a lot more appealing to a seller who’s looking to maximise the amount they make off a sale. The majority will choose the marketplace where they can maximise profits as this is just human nature.
This means that these marketplaces can increase their market share within the ecosystem, taking their piece of the pie within the NFT trading market.
Royalties Determine the Market
A prime example of marketplaces recently changing their model would be Magic Eden — Solana’s leading NFT marketplace.
Magic Eden held over 90% of market share/trading volume for months on end since their inception, but have recently been challenged by other marketplaces that have introduced optional royalties. These marketplaces include Yawww, Hadeswap and Solanart, to name a few.
The Solana giant recently saw their market share drop to 58%, a record low in recent times. This has resulted in a reaction that has created a lot of uncertainty within the Solana NFT ecosystem. As of now, royalties are optional on Magic Eden — putting many projects and creators that have chosen to share their work on Solana under a lot of pressure.
With optional royalties coming into play on Solana, this has created a mass amount on uncertainty within the market amongst both project leaders and NFT investors. There is now less demand to build on Solana, ultimately resulting in less projects launching and potentially less liquidity.
Should Royalties Exist?
There is now a debate about whether royalties should or shouldn’t exist within NFTs — and there is a fair argument for both sides.
One side states that royalties are one of the true innovations of NFT technology, empowering creators and giving them opportunities that weren’t possible before. Royalties have provided creators with consistent streams of income for past work and new work — this with the combination of open marketplaces have really paved a pathway for creators to grow without the need for large companies to help distribute their work.
At Momint, we believe in the power of royalties and will always have them enforced on our marketplace. We believe that royalties are deserved by the creators, and they will incentivise creators to keep providing value to their holders and followers. Creators and projects are able to choose their own royalties before launching with us.
On the other hand, royalties have become a bit of nuance in various ecosystems. The rise of NFT collections has seen millions of projects launch with the goal of raising capital and taking advantage of the consistent earnings that royalties provide.
Some projects have amazing intentions with these earnings, while the majority of projects fail to use the earnings to good effect and don’t provide value to their holders, or their respective ecosystems. There are perhaps too many projects out there riding on the pleasure on royalties, without building towards their roadmap.
What Next for NFT Royalties?
The rise of optional royalties has created a lot of uncertainty around various NFT markets. Royalties are without a doubt a key selling point when it comes to deciding what blockchain to launch or build on, and with various major marketplaces implementing optional royalties, projects and creators are forced to consider other blockchains.
There is now an incentive to develop a new standard for NFTs that enforces royalties on-chain, rather than just on a marketplace level. This ensures that no matter the transactions around a token that takes place, royalties are paid by the seller. This is however almost impossible to implement under the current NFT token standard.
Until this token standard is introduced, NFT projects may need to be more creative when it comes to revenue generation and become less reliant on royalties.
Momint’s marketplace will always have royalties enforced. We believe they are key for incentivising creators of all kinds, and we believe that they are a cornerstone of the technology.