Royalties

How NFT royalties work

The original mechanic:

• Creator sets royalty percentage when launching collection (typically 5-10%).
• On secondary sale, marketplace routes royalty to creator.
• Buyer pays total price; royalty goes to creator alongside seller proceeds.
• Recurring income for creators on every resale.

This was novel — physical art creators only earn from initial sale; NFT royalties enabled ongoing income.

The royalty controversy

A defining 2023 event:

• Originally — major marketplaces (OpenSea) enforced royalties automatically.
• 2022-2023 — competition changed dynamics. Blur emerged with reduced royalty enforcement and trading rewards.
• Race to the bottom — pressure from Blur pushed OpenSea to make royalties optional.
• Creator income collapsed — what had been substantial ongoing revenue largely ended.
• Industry-wide impact affected NFT economic models.

The episode revealed structural fragility: royalties were never enforced at the smart-contract level, only by marketplaces.

Why on-chain royalty enforcement is hard

The fundamental issue:

• Smart contracts can't easily prevent transfers that don't pay royalties.
• Various technical approaches (operator filters, blocklists, transfer hooks) — all imperfect.
• Determined buyers and sellers can use private transactions to avoid royalty payment.

ERC-2981 standardized how royalty information is encoded but doesn't enforce payment. The standard makes royalties advisory rather than mandatory.

Where royalties still happen

Despite weakening, royalties persist in some forms:

• Some marketplaces still enforce by default (with optional override).
• Premium collections with strong community sometimes maintain royalty payment.
• Higher-friction sales — direct gallery sales — often still pay.
• Creator-controlled marketplaces can require royalty payment.

But aggregate creator royalty income is dramatically lower than 2021-2022 peak.

Royalties vs. licensing

NFTs and IP licensing have different relationships:

• NFT royalties — recurring sales-based payments to creator.
• IP licensing — fees for using underlying intellectual property.
• Some NFTs grant IP rights (CC0, BAYC's commercial rights for holders).
• Most NFTs don't grant IP rights in copyrighted material.

The relationship between NFT ownership and IP rights varies by collection.

Royalties in other contexts

The term appears across various IP and content businesses:

• Music royalties — from streaming, sales, performance, sync licensing.
• Book royalties — to authors from publishers.
• Patent royalties — for licensed technology.
• Mineral royalties — for resource extraction on owned land.

Each has its own structure, but the basic concept (recurring payment based on use) is consistent.

What individuals should know

For NFT collectors:

• Royalty enforcement varies by marketplace.
• Don't assume royalties are paid on every secondary sale.
• Specific collection economics depend on royalty enforcement.

For NFT creators:

• Plan economic models that don't depend solely on royalties.
• Diversify revenue across primary sales, royalties, other income.
• Consider on-chain mechanisms that don't require marketplace cooperation.
• Build community that values supporting creators.

The 2022-2023 royalty erosion was one of the most consequential NFT-industry developments. Creators that built businesses around royalty income were affected significantly. The current environment is more challenging for sustained creator income from secondary markets, requiring different approaches than the 2021 model implied.