How do NFTs create royalties?

Understanding NFT Royalties in the Digital Art Economy

1. Non-fungible tokens (NFTs) have revolutionized digital ownership by enabling creators to tokenize their work on blockchain networks. When an artist mints an NFT, they embed metadata that includes information about the artwork, ownership history, and smart contract rules. One of these rules can be a royalty mechanism, which ensures the original creator receives a percentage of future sales whenever the NFT changes hands.

2. Royalties are enforced through smart contracts deployed on blockchains like Ethereum, Solana, or Polygon. These self-executing contracts automatically trigger payments to the creator’s wallet upon resale. For example, if an artist sets a 10% royalty during minting, every subsequent sale on a compatible marketplace will send 10% of the transaction value back to the artist without requiring manual intervention.

3. The implementation of royalties depends heavily on marketplace compliance. While the smart contract defines the royalty rate, not all platforms honor it. Some secondary marketplaces choose to disable royalty payments to attract traders with lower fees, creating inconsistencies across the ecosystem. This has led to debates about enforceability and fairness in the NFT space.

4. Certain protocols like EIP-2981 for Ethereum aim to standardize royalty enforcement at the protocol level, making it harder for marketplaces to bypass them. However, adoption remains fragmented. As a result, creators must carefully select platforms that respect royalty agreements to ensure consistent income from resales.

5. Unlike traditional art markets where artists rarely benefit from secondary sales, NFTs provide a transparent and automated way to sustain creative livelihoods. Artists no longer need intermediaries to collect royalties; the blockchain handles distribution based on predefined terms encoded into the asset itself.

Smart Contract Mechanics Behind NFT Royalties

1. At the core of NFT royalties lies the smart contract, a programmable agreement stored on the blockchain. During the minting process, developers include functions that specify royalty percentages and recipient addresses. These parameters become immutable once deployed, ensuring long-term adherence to the initial terms.

2. When a resale occurs, the marketplace interacts with the NFT’s smart contract to verify ownership transfer. If the contract supports royalties, it calls a function—such as royaltyInfo() defined in EIP-2981—to retrieve the correct payout details. This function returns the amount due and the beneficiary address.

3. Marketplaces built on compliant infrastructure automatically deduct the royalty from the seller’s proceeds and route it to the designated wallet. This entire process happens within seconds, visible to all participants via on-chain transaction records, promoting transparency and trust.

4. Developers can customize royalty logic beyond fixed percentages. Tiered models, time-based reductions, or multi-party splits are possible through advanced coding. For instance, a music NFT might allocate 7% to the composer, 2% to the lyricist, and 1% to the producer per resale.

5. Despite technical capabilities, execution relies on cooperative ecosystems. A smart contract may define a 15% royalty, but if a marketplace ignores the instruction, the payment won’t occur unless legal or community pressure enforces compliance.

The Role of Marketplaces in Enforcing Royalties

1. Leading NFT platforms such as OpenSea, Magic Eden, and Blur play a decisive role in whether royalties are paid. OpenSea historically honored creator-set royalties, reinforcing creator-centric values. However, competition drove some platforms to offer zero-royalty listings to gain market share, undermining standardized compensation.

2. Blur, a rapidly growing marketplace focused on high-frequency trading, introduced incentives for users to trade NFTs listed with 0% royalties. This shift pressured creators to lower or eliminate royalties to maintain liquidity, sparking backlash from artists dependent on secondary income.

3. In response, new platforms like Sound.xyz and Catalog emphasize fair pay and only support royalty-enforcing contracts. These niche markets cater specifically to musicians and independent creators who prioritize sustainable revenue over volume-driven speculation.

4. Community-driven initiatives have emerged to blacklist non-compliant marketplaces or promote “royalty-aware” trading. Projects may refuse to partner with platforms that disregard creator earnings, using social influence to uphold ethical standards.

5. Legal discussions are also underway regarding whether bypassing royalties violates intellectual property rights or licensing agreements tied to NFTs. Although no major rulings exist yet, the outcome could shape how strictly royalties are enforced across decentralized networks.

Frequently Asked Questions

How is the royalty amount calculated for an NFT?The royalty is typically a percentage of the final sale price. For example, a 10% royalty on a $1,000 sale generates $100 for the original creator. The exact calculation method is defined in the NFT’s smart contract and executed during settlement.

Can NFT creators change the royalty rate after minting?No, royalty rates set during deployment are generally immutable. Altering them would require upgrading the smart contract, which is only possible if the contract was designed with upgradeability features—a rare and often discouraged practice due to security risks.

Do all blockchains support NFT royalties equally?Support varies significantly. Ethereum has strong tooling and standards like EIP-2981, while Solana relies more on individual marketplace policies. Networks like Tezos and Flow were built with native royalty enforcement, offering more reliable payouts compared to others.

What happens to royalties if an NFT is sold off-chain?Off-chain transactions, such as private sales via bank transfers, do not trigger smart contract functions. In these cases, royalty payments are not automatically enforced, placing responsibility on the buyer and seller to honor the original terms voluntarily.