How Do NFT Royalties Work? An Easy Guide to Passive Income

NFT Royalties are a way of earning revenue each time an NFT is sold, regardless of the seller or buyer. This ensures that the original creator receives a specific portion of the sales value, 5% or 10%, long after the NFT has been minted. Besides guaranteeing a passive income, royalties ensure that fraudulent activities like wash trading do not occur.

This article briefly explores the concept of NFT royalties, its benefits, and how to implement it on popular platforms.

Table of Contents

What are NFT Royalties?

NFT Royalties are a way to ensure that the original creators keep getting paid for their art long after the initial transaction. This ensures that the creator is rewarded in the event of a price appreciation and does not feel cheated.

Almost all NFT creation tools and platforms support the inclusion of royalties into NFT prices. Further, if you are creating NFTs through a smart contract that is developed from scratch, you can include any royalty value you desire.

2 Most Important Benefits

Royalties ensure a regular passive income for NFT creators and are crucial in preventing dubious trading activities like wash trading.

Sustained Passive Income for Creators

Original creators have been neglected in the traditional world, and many of them lived modest lives despite their paintings being sold for millions of dollars in secondary auctions.

However, the world of NFTs has addressed this issue very well. With NFTs, royalties are once set and delivered to the original creator as long as they are traded.

Prevents Wash Trading

Wash trading is a common phenomenon in which false trading volumes are generated by trading an NFT or crypto between several accounts. The false volumes, hence generated, lure unsuspecting investors and bot traders into believing there has been high market activity and the asset could soon rally.

With NFTs, royalty acts as a deterrent to wash trading. A small percentage of the traded value goes to the original creator each time an NFT is traded. Hence, if someone wants to do wash trading on that NFT, they will have to pay the royalty fee on each trade, resulting in a significant loss for the wash trader.

How Does NFT Royalty Work?

NFT royalties are ingrained in the NFT smart contract that mints them. When creating the smart contract, whether through smart contract development or a codeless platform like Rarible, a certain amount of royalty fees are baked inside the smart contract, say 5% or 10%. Now, each time the NFT gets sold, the fees get credited to the original blockchain address that minted the NFTs.

Let us understand this through an example.

Suppose you create an NFT on a tool such as Rarible or OpenSea. On the very same screen where you enter the details of the NFT, such as image, video, name, etc., there is an option to set royalties.

If you set a 5% royalty, you will receive 5% of the transaction value, regardless of its size, for every transaction involving this NFT. This even works when your first secondary sales value is $10, but your NFT appreciates, say, $5 million. This even works when your first secondary sales value is $10, but your NFT appreciates $5 million. You will receive a 5% royalty in these transactions, i.e., $0.5 and $250k.

How To Set Your Desired Royalty on an NFT?

Most codeless NFT creation platforms implement NFT royalties in similar ways. They simply let users choose their desired royalty percentage and mint the NFT with those percentages baked into the NFT smart contract.

Below are the three most popular ways to add royalties to their NFT creations. These platforms allow you to add royalties to your previously created NFTs retrospectively. However, you must verify that you can still access the blockchain address that minted them first.

Opensea

On Opensea, click on Create to start creating a new NFT.
Connect your wallet directly or via Wallet Connect.
You will be redirected to the details page, where you need to enter the details of your NFT.
At the bottom of the page, you will find the royalties section.
Enter the royalty amount you desire for your NFT.
Mint the NFT and finalize the transaction using your wallet.

Rarible

On Rarible website, select Create on the top menu.
Connect your wallet.
Choose the blockchain on which you wish to create the NFT.
Choose the desired royalty percentage and enter it in the royalties field.
Mint the NFT to finalize the royalty using your wallet.

NFT Smart Contracts

This is the most common way of creating an NFT, but it requires some expertise.

The “royaltyinfo” struct allows you to add royalties to your NFT smart contract.
To get the desired royalty figures, you need to add the receiver address and royalty amount to the structure as parameters.
Once the NFTs are minted, you will receive royalties with each transaction.

Conclusion

Royalties are a way for NFT creators to earn passive income. They allow creators to be paid a fair value with each transaction and help prevent fraudulent activities like wash trading.

Most methods of adding royalties are easy on codeless platforms or via Solidity (ETH), making it easy for creators to integrate royalties with their NFT collections.

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