Artists are often told that NFTs can automate royalty payments, but in reality, the NFT marketplaces set the rules for how royalty payments are made.
Even though NFT royalties are easy to distribute, it would be a mistake to think that royalties are built into NFTs. Royalties are a common reason why people say artists should make NFTs of their work. NFTs, which are also called “non-fungible tokens,” are a type of cryptocurrency where each token is unique and stands for a piece of content or data that is usually stored in a URL in the smart contract code of the token’s blockchain.
Smart contracts are the technology that makes NFTs work, but most people don’t realize this. This is why NFTs are so hard to understand. NFT marketplaces use their own smart contracts to handle the payment processing side of trading NFTs. A portion of this payment can go to the creator of the NFT.
The Block reported that the NFT marketplace Sudoswap recently set its royalties to 0%. This caused a huge debate in the community about the pros and cons of royalties. Right now, royalties are enforced and processed by the payment processor (the NFT marketplace), not by the NFT’s token contract. Early NFTs had the ability to buy and sell tokens built into their contracts, but this wasn’t part of the ERC-721 token standard, which is what all NFTs are built on today. Because of this, a seller who doesn’t want to pay the royalty fee can just sell the token on another market that doesn’t pay royalties. This completely defeats the purpose of minting the work as an NFT for royalty payments.
We need a new standard.
Royalty payments have been a part of business for a very long time. They are often written into contracts and paid out at regular intervals, but this means that you have to trust a third party to pay out the royalties in a reliable way. If smart contracts had automated royalties, this problem would no longer exist. But this is almost impossible to do in practice with the current NFT token standard. This is why NFT marketplaces like OpenSea are used to pay royalties. This makes it hard for the artist. They could limit where the token could be sold, making it less appealing to buyers, or they could sell it for a lot more when it was first made.
One way to find a middle ground would be “transfer fee royalties” in which the transfer function is changed so that it automatically charges a flat fee in stablecoins or cryptocurrency. Even though it would be inconvenient, it would make sure that the artist always gets paid a flat fee, no matter where the NFT is sold or transferred. The royalty would be enforced by the token’s contract, so no one could get around it by selling the token on another marketplace. There may be other workable solutions, but until one is chosen, the royalty problem won’t go away, and artists won’t sell their work as NFTs.
At the moment, NFT royalties are taken care of by NFT marketplaces because this is the easiest and most direct way to do it. However, this means that royalties are not guaranteed. Right now, there is no good way to enforce a royalty system that the seller can’t get around or that doesn’t stop the NFT from moving on the blockchain. NFTs may not be able to get a fully automated royalty system that is enforced by the token for a while, but that won’t stop blockchain developers from trying to find a solution that works for everyone.