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Finding a way to continually profit from their creations has long been a challenge for artists. Often, a creative artist will profit only one time from the initial sale of their work. However, if an artwork becomes more valuable, the artist typically doesn’t have the ability to continue reaping the rewards.
The cryptocurrency sphere is using NFT royalties to change this. A closer look at the NFT market can give you a better understanding of how to generate passive income from your work.
NFT royalties are fees payable to content creators each time their works are sold. By establishing NFT royalties, creators can continue to profit on a perpetual basis, which may also encourage them to continue making content.
Historically, content creators and artists have had to continue producing work in order to support themselves. Their efforts produced a single payday, so that increased popularity of their established work didn’t yield any dividends for them. NFTs, or non-fungible tokens, are digital assets that can be bought or sold using cryptocurrencies. They use smart contracts to support transparent, private transactions. At the same time, they provide the opportunity for artists to earn passive income through a simple minting process. Once an NFT has been minted, the artist will receive a portion of the transaction each time a sale occurs in perpetuity.
An NFT royalty is a type of guaranteed payout to the original artist, stemming from secondary sales when an NFT holder sells the artist’s work to another buyer. To earn NFT royalties, the artist must mint the work. The percentage of each sale that’s paid in royalties is set up front by the artist. While there is no set requirement, the average royalty is close to 6%. Once an NFT is minted, the royalty is automatically collected and paid to the artist. NFT royalties are monitored on a blockchain. Minting involves adding specifications related to the royalties to the NFT’s smart contract.
When digital assets are created, their artists can access and adjust their smart contracts, the underlying technology powering NFTs. In doing so, the creator essentially programs the NFT to produce royalties specifically for them at each sale. The coding establishes an automated process to collect royalties from the sale and distribute them to the creator. No additional steps are required, either by the parties involved in the sale or by the content’s creator.
While average NFT royalties are around 6%, there’s considerable variation. In fact, NFT holders may expect to pay a royalty of between 3% to 10% for their sales. The royalty is based on the NFT’s sales price, which may be different for each sale. Therefore, the creator may earn a different amount with subsequent sales even though the royalty percentage remains the same. In the event of a remainder from the royalty calculation, the artist’s fee may be rounded off.
Some NFT marketplaces — including sudoswap, LooksRare and X2Y2 — have either eliminated an NFT royalties system or taken steps to dramatically curb it. This trend began in summer 2022, when there was a move to make royalties optional, with marketplaces creating a type of “tipping” system. However, many artists have been generating passive income from their work, so this shift in trend created financial turmoil.
While there has been a backlash against marketplaces seeking to reduce or eliminate NFT royalties, note that not all NFT marketplaces have taken this approach. OpenSea, for example, is an established marketplace that continues to support the royalty system.
Many digital artists have boycotted exchanges that no longer support NFT royalties for their digital assets. This has caused trading volume at some exchanges to plummet. For example, X2Y2 cut out royalties on August 26, 2022. On that date, trading volume declined from 11,540 to 547 ETH. Notably, one source reports that the number of NFT holders and buyers who have opted into paying NFT royalties has declined from 75% to 18% in the space of a month.
Due to the ensuing backlash, some exchanges have restored royalties. For example, only a few weeks after Magic Eden set royalties at nil, it reestablished a royalty fee of 3.33%. An announcement was made on November 18, 2022 that X2Y2 has also reinstated royalties on all collections listed on its platform.
The only surefire way for artists to receive NFT royalties on their work is to codify the royalty structure in their original smart contracts. Without this codification, exchanges can institute a tipping structure, or completely eliminate royalties and tipping altogether. OpenSea has recently introduced a new tool to enforce royalty payments.
The new OpenSea royalty enforcement tool went live on November 8, 2022. Its purpose is to make NFT royalties enforceable on its blockchain. When artists create digital assets with the royalty enforcement tool, these works cannot be sold on the NFT market through exchanges that don’t enforce the payment of NFT royalties. Currently, this tool is only available for new collections, but OpenSea has plans to release a similar tool for established collections as well.
While the process of writing an NFT smart contract with royalties may seem daunting, the steps can actually be completed in a few minutes. If you don’t already have a CLI tool, it will need to be installed. Then, you establish your network, such as GoChain or another option. Ensure that your new network account has enough gas to run. This initial legwork only needs to be done one time. For future NFT smart contracts, you can skip to the following steps: Using the CLI tool, you can generate code for ERC-20 and for ERC-271. The result is the creation of a KATS.sol file. Compile and deploy the file to obtain the new NFT contract address, and you can then mint the NFT to start receiving royalties.
In order to set up your NFT royalties, it does take a little extra work up front. However, the advantages of NFT royalties may make this effort well worth your while. What are the primary advantages of earning royalties off of the digital assets that you create?
Royalties are paid in perpetuity, which means that you’ll continue to receive royalties each time one of your digital assets is sold to a new NFT holder. Royalties support the generation of passive income, enabling artists to gradually increase their earnings year after year through their hard work.
Just as with traditional artwork, digitally created assets can increase in value over time. The original sale between the creator and the first buyer may have the lowest sales price. As an asset increases in value, future NFT holders benefit financially from its sale. NFT royalties give creators the opportunity to see increased royalty payments as the value of their work increases.
While the advantages of earning NFT royalties are extensive, there are a few disadvantages that can directly impact the passive income potential of a creator’s digital assets and discourage some artists from continuing to create work.
One of the reasons why NFTs tend to increase in value is because they’re unique. However, it’s possible for fraudsters to create imitations to piggyback off of the success of the original NFTs. These fraudulent works can potentially earn NFT royalties and prevent a work’s original creator from fully capitalizing on their efforts. However, the NFT market is catching on. Many established platforms have (or are building) solutions to flag imitations.
Another disadvantage associated with NFT royalties is price volatility, which means that artists cannot rely on a steady stream of passive income from royalties. Cryptocurrency prices can fluctuate dramatically within a short period of time, which has a direct impact on the value of digital assets at any given time. In turn, this fluctuation can affect demand.
In addition to NFT royalties, there are other ways for NFT creators to earn passive income. Whether they make music, podcasts or other creative works, their NFTs can provide an ongoing income stream to yield both short- and long-term benefits.
Rather than selling their work, creators can hold on to their digital assets and stake them. Staking NFTs requires that they be locked, which means that they temporarily become part of a blockchain network. The process of NFT staking is easy, and it produces cryptocurrency rewards for as long as the NFT is staked. However, while an NFT is locked, it cannot be traded, sold or moved.
NFTs have gaming applications, making it profitable to rent them to other players. These NFTs may be tools, weapons, skins, skills and more. Smart contacts enable you to dictate the terms of the rental agreement. Generally, NFT rentals have shorter terms, so this is a way to earn passive income for a short period of time before the renting process must be completed again.
You can also enjoy a steady stream of income by adding NFTs to liquidity pools. Liquidity pools allow platforms to make loans, and they use locked digital assets to fund those loans. When an NFT contributes to a liquidity pool, its owner may earn ongoing rewards for as long as the NFT remains in the pool.
Utilities are established in an NFT's underlying code, and they can create additional income for the creator. These utilities include providing access to meetups, inviting NFT holders to events and more. They may also tap into the yield from continued sales of NFTs, and these profits can be distributed to the NFT holders.
Yield farming was originally used on DeFi ecosystems. Now, it’s used to generate returns in the NFT market as well. This method uses the same NFTs to allow investors to stack returns from different platforms. Although yield farming is increasing in popularity, it’s not yet available on most platforms.
Although NFTs are generally in the form of artworks, they can be any type of digital asset. Whether you create a podcast, a poem, visual art or something else, you can earn passive income from your NFT in several exciting ways. To profit from your NFTs, consider using NFT royalties and other methods to optimize your financial gains.
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