Non-fungible tokens (NFTs) have rapidly emerged as a powerful tool for creators of digital art, music, and other assets to monetize their work. One of the most attractive features of NFTs is the concept of royalties, which allows creators to earn a percentage of the sale price each time their work is resold. In this article, we will dive into the world of NFT royalties, exploring their benefits to creators, how they work within the NFT ecosystem, and how nonprofits and project creators should be thinking about NFT royalties when giving away NFTs as part of fundraisers.
The Significance of NFT Royalties for Nonprofits and Project Creators
NFT royalties are a pre-defined percentage of the sale price paid to the creator or original owner each time their work is resold. This feature provides creators with a sustainable income source, allowing them to capitalize on the appreciating value of their works as they are bought and resold on the secondary market. The average NFT royalty typically ranges from 5-10%.
For nonprofits and project creators, NFT royalties offer an opportunity to generate passive income that can be used to support their causes, projects, or initiatives. When giving away NFTs as part of fundraisers, it's essential to consider how the royalty structure can impact the long-term benefits of the campaign. By incorporating NFT royalties, nonprofits and project creators can ensure that they continue to receive financial support from the secondary sales of the NFTs they initially distributed, creating an ongoing revenue stream.
The Mechanics of NFT Royalties
When an NFT is minted, the creator has the option to set a royalty percentage they will receive whenever their NFT is sold in the future. This percentage is typically between 2.5% and 10%, but can be customized to the creator's liking. When the NFT is resold on an NFT marketplace, the royalty percentage is automatically deducted from the sale price and paid out to the original creator or owner.
To begin earning NFT royalties, creators must first mint their NFTs by registering their digital asset on a blockchain network. During the minting process, they can specify the amount or percentage they would like to receive from secondary sales using smart contracts. When secondary sales occur, the smart contract automatically allocates the predetermined percentage to the original owner.
The royalty percentage for an NFT remains fixed, while the sale price may vary. This can cause variations in the amount of royalty the creator earns from each sale, depending on market demand, scarcity, and other factors.
Theory vs. Practice: The Dependence on Marketplace Commitment
While NFT royalties are governed by smart contracts, their effectiveness is reliant on the commitment of the NFT marketplace, where the secondary transaction occurs, to uphold the conditions outlined in these contracts. This is because eventhough royalties policies are immutable smart contracts, the Ethereum blockchain isn’t able to enforce stipulations on token transfers. Reselling does require a royalty payment, but just transferring the NFT to another wallet, does not.
Therefore, any enforcement of the smart contract is inherently voluntary. The platforms simply passed the option of whether it was a resale or token transfer on to the buyers. And since NFT royalties are not subject to legal jurisdiction, NFT marketplace rules and terms of use are the order of the land.
The incentive for marketplaces to drop NFT royalties is simple. It attracts traders who want greater profit margins on NFT resales. “Right now, we’re seeing some marketplaces looking for an edge during the current NFT market downturn, and they’re turning to tactics like eliminating mandatory royalties,” MakersPlace CEO Craig Palmer said in a statement. “MakersPlace has always been a firm supporter of creators and while this ‘optional’ approach where the buyer decides whether or not to pay royalties may make sense to other marketplaces, it doesn’t fit with our vision for the space.”
Some NFT marketplaces, such as LooksRare, Magic Eden, and X2Y2, have shifted away from a traditional NFT royalty model. These platforms now offer a royalty-optional system, allowing NFT buyers to decide whether they will honor the royalty policy. Such decisions have led to platforms like LooksRare sharing 25% of protocol fees with creators as a means of compensating for potential revenue loss. Others offer optional tipping mechanisms to creators.
In response to these changes, some NFT artists have started blacklisting marketplaces that circumvent royalties. Efforts are also being made to establish community-managed whitelists and blacklists for broad enforcement across the Ethereum NFT ecosystem.
However, it is important to note that not all NFT marketplaces have eliminated or reduced NFT royalties. Platforms like OpenSea, Rarible, SuperRare, and Foundation continue to support the royalty system, with nuances on exact royalty percentages and fees.
Strategies for Nonprofits and Project Creators to Optimize NFT Royalties in Fundraisers
As a fundraising organizer you are not likely to be going to these NFT marketplaces directly to give away or sell your NFTs. Your donors will be the ones chosing to trade or resell your NFTs on these NFT marketplaces if they feel it benefits them. So it may seem like your options are limited once you've given away inital NFTs to your donors. However, here are are few things to consider when devising your initial NFT fundraising campaign.
Choose the Right Royalty Percentage: When minting NFTs for fundraisers, carefully consider the royalty percentage that will provide the most significant long-term benefit. Setting a royalty rate too high may deter potential buyers, while setting it too low could limit the potential income from secondary sales.
Promote Awareness of Royalties and Their Benefits: Educate potential buyers and supporters about the concept of NFT royalties and how they can contribute to the ongoing success of the nonprofit or project. This can help create a sense of shared responsibility and encourage buyers to view their purchase as a long-term investment in the cause.
Monitor and Track Secondary Sales: Keep track of the NFTs distributed during the fundraiser and their secondary sales, as this can provide valuable insights into the ongoing revenue generated through royalties. This information can be used to inform future NFT-based fundraising campaigns and optimize the royalty structure to maximize revenue.
Adapt and Adjust to the Evolving NFT Landscape: As the NFT market continues to grow and evolve, it's crucial for nonprofits and project creators to stay informed about changes in the NFT ecosystem that could impact their royalties. By staying up-to-date with the latest developments and adapting accordingly, they can ensure that their NFT-based fundraising campaigns remain effective and continue to provide long-term benefits.
Advocate for Standardized Royalty Practices: Nonprofits and project creators can join forces with other stakeholders to advocate for standardized royalty practices across NFT marketplaces. By doing so, they can contribute to a more transparent and fair ecosystem, benefiting both creators and buyers.
The Future of NFT Royalties and Their Role in Fundraising
As the NFT market continues to grow and evolve, it's likely that the concept of royalties will adapt to the ever-changing landscape. New models for royalty distribution and partnerships between NFT platforms and traditional creative industries may emerge, allowing artists, nonprofits, and project creators to benefit from a more extensive range of revenue streams.
NFT royalties also have the potential to reshape the way creators approach their work, with a focus on long-term value creation and sustainability. This shift could result in the production of higher-quality works and innovative collaborations between artists, nonprofits, project creators, and collectors.
Moreover, as NFT platforms continue to develop, the standardization of royalty practices across marketplaces could become more prevalent, making it easier for creators to navigate the NFT ecosystem and benefit from their works' ongoing success.
The future of NFT royalties depends on the commitment of marketplaces, creators, and collectors to uphold and enforce these policies. By staying informed, advocating for their interests, and collaborating on solutions, stakeholders can shape the NFT royalty landscape to benefit all parties involved. For nonprofits and project creators, incorporating NFT royalties in their fundraising campaigns can provide a sustainable and potentially lucrative revenue stream, contributing to the long-term success of their initiatives.