How do NFT royalties work, and are they always paid?

What a royalty is

Here, a royalty is a payment to an NFT's creator or rights holder each time the NFT is sold again.¹ ethereum.org gives the example of a creator who programs a 5% royalty into the NFT's contract.³

US copyright law does not expressly give artists a right to a cut of resales.² So any NFT royalty depends on the NFT's code and the rules of the marketplace where it is sold.²

The ERC-2981 standard

ERC-2981 is a shared way for an NFT contract to state its royalty.¹ It works with NFTs that follow ERC-721 or ERC-1155.¹

• A marketplace calls a function named royaltyInfo, giving the token ID and the sale price.¹
• The contract answers with who should be paid and how much.¹
• The amount is always a percentage of the sale price.¹
• It is paid in the same currency as the sale. A sale in ETH means a royalty in ETH.¹

The standard only shares the amount and the recipient. Actually sending the money is the marketplace's job.¹

Working it out

The formula is simple: royalty = sale price × royalty percentage.¹ At a 10% royalty, 10% applies whatever the price, small or large.¹ If the answer is not a whole number, the contract may round up or down. At 10% of 999, either 99 or 100 is valid.¹

Why it is voluntary

The blockchain can't tell whether a transfer is a sale. Some transfers just move an NFT between wallets.¹ So ERC-2981 says the royalty payment must be voluntary.¹ ERC-2981 says that if a marketplace does not implement it, no royalty is paid through the standard.¹ A marketplace may still run its own royalty system. The standard's authors noted that many of the largest marketplaces had built their own.¹

The authors expected marketplaces to adopt it by choice, to give artists ongoing funding.¹ They also said marketplaces that support the standard must pay wherever a sale happens, even off the blockchain.¹

What happened in practice

The US Patent and Trademark Office and Copyright Office published a report on NFTs.² As of March 2024, the report said resale royalties were not guaranteed. Payment depended on whether the marketplace where the NFT was resold honoured it.² People who commented to the US offices warned that royalties may be hard to enforce and easy to get around. Selling on another marketplace, or away from the blockchain, are two ways.²

As of March 2024, the report said NFT marketplaces, most recently OpenSea, had moved to royalty-optional models.²

On 2 April 2024, OpenSea announced that creators could use ERC721-C, a standard from Limit Break, to set and enforce their own "creator earnings" on OpenSea.⁴ For contracts that are not compatible with ERC721-C, OpenSea said creators could still set creator earnings, but only as optional.⁴