The world of Non-Fungible Tokens (NFTs) has transformed how digital assets are bought, sold, and monetized. Artists, musicians, game developers, and even authors are tapping into this technology to reach global audiences and create new revenue streams. Among the most revolutionary features of NFTs is the concept of royalties—a built-in, automatic mechanism that enables creators to earn money not just once, but continuously from their work.
While royalties have existed in traditional industries like music, publishing, and film for decades, NFTs bring a new level of transparency and automation to the process. However, NFT royalties operate very differently than in the conventional world, and understanding how they work is essential for creators, collectors, and investors alike.
In this article, we’ll break down NFT royalties in detail, explaining what they are, how they function on the blockchain, why they matter, and the current challenges and innovations shaping their future.
What Are NFT Royalties?
NFT royalties refer to payments that are automatically distributed to the original creator every time the NFT is resold on a secondary market. This means that even after an artist has sold their digital artwork, they can continue to earn revenue each time it changes hands in the future.
These royalties are encoded into the NFT’s smart contract—the self-executing code that governs the rules of ownership and transactions. Once set, these terms are enforced every time the asset is sold, ensuring the creator receives their predefined share without needing to rely on intermediaries or manually track sales.
For example, if an artist sets a 10% royalty on an NFT and it is resold for 5 ETH, they would automatically receive 0.5 ETH from that transaction.
Explore More: What Are NFT Terms?
The Role of Smart Contracts in Enforcing Royalties
Smart contracts are at the heart of how NFT royalties work. These are bits of code written onto the blockchain that define the rules for the asset. When a creator mints (i.e., generates) an NFT, they have the opportunity to embed certain parameters—one of which is the royalty rate.
These smart contracts are not governed by any central party. Instead, they are executed automatically whenever a triggering event occurs—in this case, the sale of the NFT. If the royalty conditions are part of the contract and the marketplace supports royalty distribution, the blockchain will ensure that the royalty is paid out in accordance with the terms.
However, it’s important to understand that not all marketplaces follow the same protocols. Some allow full customization of royalties, while others may not honor royalty enforcement unless explicitly built into their system. This creates a landscape where the effectiveness of NFT royalties can vary significantly depending on where the asset is traded.
Why NFT Royalties Matter for Creators
The emergence of NFT royalties represents a seismic shift for artists and creators who have long struggled to benefit from the long-term appreciation of their work. Traditionally, once a painting, song, or digital file was sold, the creator had no further claim to any profit made in future sales or uses.
NFT royalties change this dynamic by ensuring artists and creators participate in the financial upside of their work over time. If their digital art becomes more valuable or widely circulated, they can earn recurring income without having to reissue or resell new work. This not only incentivizes high-quality content creation but also helps establish a more sustainable income model for independent creatives.
Moreover, NFT royalties can be tailored to specific needs. A musician may set a different rate for songs than a digital illustrator would for a visual artwork. The flexibility provided by smart contracts allows creators to define their compensation model based on their unique business and artistic goals.
How Different Marketplaces Handle Royalties
While the idea of automatic royalty enforcement sounds ideal, its real-world application is more fragmented. Each NFT marketplace handles royalties differently, and this can impact how consistently creators receive their payments.
OpenSea, for example, allows creators to set royalty percentages during the minting process and typically enforces them during secondary sales on their platform. However, if the NFT is transferred to another marketplace that does not support royalties, the creator might not receive anything from future transactions.
LooksRare, X2Y2, and Blur are examples of marketplaces that have at times challenged the standard royalty model by offering lower or optional royalty fees to attract buyers. This has sparked intense debate within the NFT community about how to balance creator rights with open market dynamics.
To combat this, some creators are now turning to on-chain royalties, which are enforced at the protocol level and not dependent on marketplace policies. These types of royalties are harder to circumvent and provide greater protection for artists, though they require more technical implementation and are not yet widely adopted.
Customizing NFT Royalties: Flexibility and Limitations
When minting an NFT, creators can typically choose a royalty percentage—usually ranging from 2.5% to 10%, though higher rates are possible. This percentage defines what share of each future resale will be sent back to the creator’s wallet.
However, there are some limitations:
- Royalties are only enforced if the NFT is sold on a marketplace that honors them. Private transfers or direct wallet-to-wallet sales can bypass royalty enforcement unless special smart contract protections are in place.
- The percentage must be set at the time of minting. Once the NFT is created and minted onto the blockchain, most royalty terms cannot be changed later. This emphasizes the importance of planning and strategic pricing at the outset.
- Royalties do not guarantee revenue. If the NFT is never resold, the creator will only benefit from the initial sale. Royalties only come into play if secondary market activity exists.
Despite these limitations, royalties provide a significant upgrade over the traditional art market’s inability to compensate creators for resales, and this benefit is one of the key drivers behind the popularity of NFTs in the creative industries.
Challenges and Controversies Around NFT Royalties
As the NFT space has matured, so too have the debates around royalties. Some of the challenges facing royalty systems include:
- Marketplace circumvention: As mentioned earlier, some platforms either reduce or completely ignore royalty enforcement, arguing that optional royalties lower transaction costs and attract more traders. This often undermines the intent of the creator.
- Decentralization vs. enforcement: Enforcing royalties across decentralized platforms without introducing central authorities is a technical and ideological challenge. Protocol-level solutions are emerging but are not yet universally adopted.
- Speculation and flipping: Many NFT buyers are investors or speculators looking to “flip” assets for quick profit. These users may prefer marketplaces with low or no royalty fees to maximize their margins, creating tension between artist income and trader incentives.
Despite these issues, the NFT community continues to experiment with new models for royalty distribution. Innovative protocols like EIP-2981 (a proposed Ethereum standard for royalty info) and on-chain mechanisms are gaining traction, offering hope for more robust, fair solutions.
The Future of NFT Royalties
The long-term potential of NFT royalties extends beyond digital art. In the future, we could see royalty structures embedded in virtual real estate, software licenses, online educational content, and even event tickets. As smart contract standards improve and marketplace interoperability becomes more seamless, royalty systems will likely become more consistent and reliable.
Creators may also explore dynamic royalties, which adjust based on the number of resales, the asset’s value appreciation, or engagement metrics. Such innovations could further enhance creator income while encouraging long-term value and community participation.
Ultimately, NFT royalties are a step toward more equitable digital ownership—rewarding creators not just once, but continuously for the value they generate in the digital world.
Conclusion
NFT royalties represent one of the most transformative aspects of blockchain technology for creators. By ensuring that artists, musicians, writers, and other digital innovators are compensated for each resale of their work, NFTs create a more equitable and sustainable digital economy.
However, as with all emerging technologies, challenges remain. Understanding how royalties are set, how marketplaces enforce them, and what protections exist for creators is crucial. By staying informed and choosing platforms that respect creative rights, buyers and sellers alike can contribute to a more fair and vibrant digital art ecosystem.
If you’re a creator planning to mint your first NFT or a buyer looking to support digital artists, grasping the mechanics of royalties is essential. They are not just a feature—they are a philosophy of fair compensation embedded into the very code of digital ownership.