How NFT royalties work in the real world

NFTs are often offered to artists because of their purported ability to automate royalty payments, but in reality, NFT marketplaces set royalty policies.

If it is true that NFT royalties can be easily distributed, it is misleading to think that royalties are a native feature of NFTs. Royalties are often cited as one of the main reasons why artists should mint NFTs from their work. NFTs, also known as non-fungible tokens, are a special type of cryptocurrency where each token is unique and represents a piece of content or data, usually embedded in a URL in the smart contract code of the token’s blockchain.

Smart contracts are the core technology behind NFTs, but this is generally overlooked by most people and is the reason why NFTs are so misunderstood. NFT marketplaces use their own smart contracts to handle the payment processing side of NFT trading, part of which may compensate the original creator of the NFT.


Related: Owning a Fractional NFT Doesn’t Own an NFT

As The block reported, NFT marketplace Sudoswap recently set its royalties at 0%, sparking a massive debate in the community about the pros and cons of royalties. Currently, it is the payment processor (the NFT marketplace) that applies and processes the fees, not the NFT token contract. While early NFTs had buy/sell functionality in their token contracts, this was not included in the adopted ERC-721 token standard, the compatibility standard from which all NFTs are built from today. today. Because of this, a seller who doesn’t want to pay royalties can simply sell the token on another marketplace that doesn’t participate in royalties, completely defeating the purpose of minting the work as an NFT. for royalty payments.

A new standard is needed

Royalty payments have been a staple of business for a very long time, and they’re often enforced by legal contracts and spread over regular time intervals, but this raises the issue of trusting a third party to distribute the royalties evenly. reliable. Implementing automated royalties in smart contracts would completely eliminate this problem. However, this is almost impossible to implement in practice with the current standard of NFT tokens, and this is why royalties are facilitated by NFT marketplaces like OpenSea. This leaves the artist in a difficult situation. They could restrict the markets allowed to sell the token, making it much less attractive for buyers, or they could sell the token for much more when it is created.

A compromise solution would be “transfer fees“, where the transfer function is modified to charge a fixed fee in stablecoins or cryptocurrency as part of its native functionality. Although impractical, this would ensure that no matter where the NFT is sold or transferred, the artist is still paid a flat fee, and because the royalty is enforced by the token’s contract, no one could circumvent it by selling the token on another marketplace. Other solutions may also be viable, but until a solution is adopted, the royalty problem will persist and artists will not monetize their work as NFTs.

NFT royalties are currently provided by NFT marketplaces as this is the easiest and most straightforward approach, but this means royalties are not guaranteed. Currently, there is no reliable way to enforce a royalty system that cannot be circumvented by the seller or that does not limit the movement of NFT on the blockchain. A fully automated royalty system that is enforced by the token itself may remain elusive for NFT for a while, but that won’t stop blockchain developers from trying to find a solution that works for everyone.

Source: The Block, Sudoswap

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