Learn How NFT Royalty Fees Work
Royalty fees have been around for a long time. When a music song is used commercially, a royalty fee is paid to the music creator or management company.
What Are NFT Royalty Fees?
NFT royalties are payments automatically taken from NFT secondary sales and given to the creators of the NFT collection.
These royalty fees are coded into the smart contracts when an NFT or collection is minted on a blockchain.
Creators are free to set royalty fees at the percentage they wish. Typically NFT royalty fees are set at between 5-10%.
This means that when an NFT sells for X amount there is a royalty fee added to this price. NFT buyers need to pay the price of the NFT plus the royalty fee.
When an NFT collection is minted, the royalty fee is included in the smart contract and automatically sent to the creator of the collection whenever an NFT sells on a secondary marketplace.
If an NFT has a ten percent royalty fee coded into the smart contract and the NFT sells for $5,000, a $500 fee is due. If the NFT collection increases in value then the royalty amount owed will also increase.
Why Do NFT Artists Need Royalty Fees?
Royalty fees are a form of passive income for digital artists.
New artists often sell their original NFT for only a few US dollars.
These fees allow new digital artists a small residual income from secondary sales. This income helps (struggling) artists afford to keep working and create new NFTs and also gives them money for marketing purposes.
Royalty fees are a way of compensating new artists for their time and keeps them motivated to create new art pieces.
How Do Smart Contracts Enforce Royalties?
When an NFT creator mints an NFT, it creates a smart contract on a blockchain. The fees are enforced in the smart contracts code. When an NFT is sold on a secondary marketplace, the fees are automatically enforced and sent to the creators digital wallet.
Can You Bypass Paying The NFT Royalties?
NFT swap platforms allow investors to avoid paying the royalty fees.
It is worth noting that if you bypass certain NFT collection royalty fees, you might not be able to benefit from their ecosystem.
Is There A Restriction On How Much An NFT Creator Can Set Their Royalty Fees At?
Some platforms allow any percentage, and some restrict the amount to 50% or below.
The higher the royalty fees are, the less the NFT will sell for. This is due to the added cost for investors.
If an NFT artist sets royalty fees at 50%, an NFT investors will need to not only pay this fee when they purchase the NFT, but also calculate this into their resale price. They would need to sell the NFT at 50% more than they bought it for, simply to break even!
Can Investors Opt To Not Pay The Royalties?
Magic Eden (the top Solana NFT marketplace) allows buyers to opt to pay full, half, or no royalty fees.
Can Royalty Fees Be Enforced?
Here is an example:
What Happened When NFT Swap Sites Allowed Investors To Avoid Paying Royalty Fees?
At the end of 2022, we saw Solana-focused NFT swap sites pop up and allow investors to not pay the royalty fees.
This led to panic on the most popular Solana marketplace, Magic Eden.
Many NFT projects decided to stop developing and working on their projects, and investors lost a lot of money.
What Is The Future Of NFT Royalties?
Magic Eden marketplace has allowed buyers to opt-in or out of paying royalty fees.
NFT swap platforms are growing in popularity too.
We will start to see some collections charge a higher upfront mint price to cover ongoing expenses.
Projects will have to create multiple new NFT collections to help raise funds and offer utilities to investors.
Over time we shall see smart contracts enforce royalties.
Projects can enforce royalties by restricting the utilities of their collections if buyers have not paid full royalty fees.
If a buyer does not pay the royalties, they will not be able to stake their NFT until the royal fees are paid.
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