NFTs: royalties and monetization

Introduction

Authors of NFTs can gain monetization not only through their sale but also through royalties they may receive from subsequent sales. A royalty is the right of the owner of a patent or intellectual property to obtain payment of a sum of money from anyone who carries out the exploitation of that asset for commercial purposes.

When an NFT is sold and the transaction is verified on the blockchain, the new owner has digital proof of the purchase. However, this does not mean that he owns the copyright of that asset, only the ownership of the NFT version of it, which is verified and can later be sold by him. The blockchain verifies the transaction, which acts as a digital receipt that validates the ownership of the NFT, but the original creator of the NFT is permanent. In the case of traditional artwork, artists only receive payment at the moment they sell the object, but selling an NFT is different, in fact, every time an NFT is resold the original creator of the NFT receives a royalty payment, which is a portion of the profit: potentially more could be earned from royalties than the initial sale of the NFT.

Royalties and marketplaces

In the case of works of art and musical pieces, artists therefore have the advantage of receiving royalties on every sale subsequent to the first one. Sales feed the so-called “secondary market” thanks to blockchain technology, which allows for secure traceability and the use of smart contracts that allow authors to be credited, automatically and immediately, with a share of the sale price.

The smart contracts written into the NFT code allow for the distribution of funds for royalty payments to the creator each time the artwork is resold. However, there is a complication regarding NFTs and their royalty payments: automatic resale royalty payments may not occur if the NFT is resold, maybe even at a much higher price, through a different marketplace than the initial one. Smart contracts give the platform the ability to automatically transfer the token from the seller’s wallet to the new owners.

The ERC-721 standard that led to the boom in the NFT market is now being revised in order to allow for a more effective method of royalty payment that does not depend on the platform that creates the NFT because the current system is based almost exclusively on the decisive role of marketplaces in aggregating the market and dictating the rules, first of all in their benefit. Here are some examples of marketplaces and their method of managing royalties.

Zora

Zora is a new NFT platform that is trying to change this system and better guarantee copyright. Every artist who put NFTs on the platform can set a “creator’s share” which is a percentage they will receive for all future sales. Furthermore, because these creator’s shares are paid automatically with smart, verifiable contracts on Ethereum, the creator never has to worry about tracking them as the royaltes are simply paid in perpetuity to their original Ethereum address with which they minted the NFT. Currently, however, the method Zora uses to pay creator fees is still not reproducible on other marketplaces and the percentage of the creator fee is only paid if the secondary sale also takes place on Zora.

Eulerbeats

The Euler Record is a limited edition set of art and music based on NFTs. The EulerBeats smart contract extends the ERC-1155 Ethereum multi-token standard to create unique non-fungible original tokens and a set of fungible print tokens for each original. EulerBeats prints fall into two categories: Genesis (27 NFT) and Enigma (27 NFT) which represent two sides of a record with 27 algorithmically generated pieces of music.  These are called “original prints” and take the form of ERC-155 NFT. Both versions share a common mathematical basis, but differ in art, music, and bonding curve structures (each original NFT has a limited set of prints with a specific price on a bonding curve). The fungible token prints of each piece are not unlimited: there are only 119 in the Genesis series and 160 in Enigma.

With each print sale, the owner of the original print automatically receives an 8% royalty through the smart contract and also gains ownership of the full commercial rights. But the royalty fee is the main reason originals are seen as so valuable: they give the owner a source of income that increases with each new print purchase.

Open sea, Rarible e Foundation

OpenSea and Rarible are Marketplaces that aggregate all NFTs created on the Ethereum blockchain. For example, when an NFT is minted on the Foundation marketplace, it is automatically displayed on OpenSea and Rarible. On these marketplaces, collectors can place open bids on minted NFTs, either as creators or collectors. You can decide to accept an offer on OpenSea or Rarible, but be aware that if you accept an offer on OpenSea or Rarible the purchased NFT will no longer be displayed on Foundation. NFTs minted on Foundation receive a 10% royalty each time a piece is resold and the royalty will be sent directly to the wallet that minted the NFT. This is because Foundation has an agreement with OpenSea and Rarible whereby all secondary market sales will receive a 10% royalty if the work is also resold on OpenSea and Rarible.

Binance

To celebrate the launch of the Binance NFT Marketplace in June 2021, Binance has called on all artists and creators to participate in the exclusive Innovative Creators Program where they are minted their artwork in NFT and then have it featured on the Binance NFT Marketplace in the first month of its launch.

As an innovative Creator at Binance, artists get the exclusivity of listing their artwork in the first month after the launch of the Binance NFT Marketplace. With limited places, this allows emerging artists to showcase their work in front of NFT collectors. Additionally, Binance will only charge a 1% transaction fee, and artists will receive 99% of the profit for the first sale of their NFTs, as well as a 1% royalty payment from each subsequent NFT exchange.

Conclusions

The NFTs royalty system is crucial for the purchase and sale of NFTs by artists and creators who are interested in tokenizing their items. The fact that there are still limitations in the management of copyrights at discretion of marketplaces can induce potential investors to desist from the idea of tokenizing their works, therefore, even the marketplaces themselves are trying to develop policies that provides greater protection and security.  Zach Burks and James Morgan have written an “Ethereum Improvement Proposal” or EIP-2981 to create an ERC-721 Royalty Standard. The main motivation is to create a modified NFT standard so that NFTs created, purchased, or sold in one market will continue to pay royalties regardless of the next market in which they are sold. With this proposed standard, it would be possible for the artist to set a royalty amount that can be paid to the creator on any marketplace that implements these tokens, while still recognizing his or her copyright.

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