Royalty Meaning

Oct 30, 2023 | Updated Oct 30, 2023

In cryptocurrency, a royalty refers to the payments that a creator makes upon each resale of their digital asset or art. The payment is a predetermined percentage of the proceeds from all future sales on the secondary market.

What are NFT Royalty?

NFT creators continue profiting from the appreciating value of their music and digital arts, among other digital assets. An NFT royalty is the percentage of the sale that is paid to an artist or creator every time their NFT is resold. The percentage is pre-defined and enables original owners to earn passive income from their works beyond the initial sale. For example, when Beeple’s Crossroads was sold in 2021, the creator received 10% of a $6.6 million resale of the piece.

How Do NFT Royalties Work?

When a radio station plays a musician’s song, that artist typically receives a certain amount per play. The amount they receive is known as royalties or royalty payments. NFT royalties work in a similar way.

During NFT minting, the creator defines the royalty terms in the smart contract. Whenever the NFT changes hands in secondary markets, the smart contract automatically triggers the rules defined for every resale. The payment is automatically debited from the sale price upon resale and allocated to the initial creator. Royalties are typically calculated as percentages of the secondary sale price, ranging between 3% to 10%. While subsequent sale prices can vary based on the NFT’s scarcity and market demand, the royalty percentage remains fixed.

For example, say you mint an NFT and embed a royalty percentage of 5%, and someone buys it for 100 ETH. If the buyer resells it for 1,000 ETH, you would receive 50 ETH, which is 5% of the sale price. Subsequently, if the new buyer resells it for a different amount, you would receive your 5% cut again.

The NFT royalty mechanism is a way of granting creators a sustainable source of income, potentially inspiring them to generate exceptional content. However, the royalty element is not applicable to all NFTs. The enforcement of royalty payments also varies across different NFT marketplaces. In some marketplaces, it is optional or unavailable.