NFT Royalties: Why Creator Fees Became Optional

Key Takeaways

• NFT royalties are creator fees paid on secondary resales, often set at a few percent.
• Royalties were enforced by marketplaces, not by the blockchain, so they could be bypassed.
• During 2022 to 2023, competition pushed major marketplaces to make royalties optional.
• A buyer choosing a zero-royalty venue lowers their cost but cuts off the creator's income.

What It Is

A royalty is a payment to the original creator triggered when their NFT changes hands again. If a collection sets a 5 percent royalty, the creator receives 5 percent of every secondary sale price, in principle, automatically.

The promise was that creators could earn ongoing income from their work, not just the first sale. An artist whose collection appreciated would keep benefiting as pieces traded. This was one of the most celebrated features of NFTs.

The reality was more complicated. The royalty was usually a setting honored by the marketplace, not a rule built into the token itself. That gap is the entire story of the enforcement debate.

The Intuition

People assumed royalties were guaranteed by the blockchain. They were not. Most NFT standards do not force a royalty payment when a token transfers. A token can move from one wallet to another without paying anyone, because the transfer function does not require it.

So royalties depended on the marketplace voluntarily collecting and forwarding them. As long as every major marketplace cooperated, the system held. The moment a competitor decided to skip royalties to offer cheaper trading, the cooperation broke.

That is exactly what happened. A buyer who can buy the same NFT for less by avoiding royalties has an incentive to use a zero-royalty venue. Marketplaces that enforced royalties lost volume to those that did not, and the pressure cascaded.

How NFT Royalties Enforcement Worked

Royalty enforcement was attempted at the marketplace layer. When a sale executed on a cooperating marketplace, the marketplace deducted the royalty from the sale proceeds and sent it to the creator's address. This worked only if the marketplace chose to do it.

To force the issue, one major marketplace introduced an Operator Filter in late 2022. The tool let creators restrict their collections so they could only be sold on marketplaces that enforced royalties, blocking sales on zero-royalty venues.

The defense failed. A token-incentivized competitor offered optional royalties and gamified trading rewards, drawing large volume. By early 2023 it surpassed the incumbent in trading volume. Reports from on-chain analytics found a large majority of total NFT trading volume flowing to zero-fee or zero-royalty platforms, because buyers preferred not to pay.

Faced with that, the incumbent capitulated. Starting August 31, 2023, it stopped enforcing creator fees on new collections, letting creators only suggest a fee buyers could choose to pay. Collections still using the Operator Filter kept enforcement until February 29, 2024, after which fees became optional platform-wide.

Worked Example

Suppose a creator launches a collection with a 5 percent royalty and a 1 percent additional marketplace consideration. An item resells for 10 ETH.

On a royalty-enforcing marketplace:

creator royalty = 10 * 0.05 = 0.5 ETH
seller receives  = 10 - 0.5 - marketplace fee

The creator earns 0.5 ETH. Now the same item resells for 10 ETH on a zero-royalty venue. The buyer pays the same headline price, but the creator receives nothing, because the venue does not collect the royalty. The seller keeps more, and the creator's ongoing income disappears. Multiply that across thousands of trades and the difference between an enforcing and a non-enforcing market is the creator's entire secondary revenue stream.

Common Mistakes

1. Assuming royalties are enforced by the blockchain. Most NFT standards do not require a royalty on transfer. Enforcement depended on marketplaces choosing to collect it, which made it optional in practice.

2. Believing a stated royalty is guaranteed income. A collection can advertise a 5 percent royalty, but if trading moves to zero-royalty venues, the creator collects little or none of it.

3. Ignoring where volume actually trades. During the 2022 to 2023 shift, most volume migrated to platforms that made royalties optional. The stated royalty meant little once buyers chose the cheaper venue.

4. Confusing royalties with marketplace fees. The marketplace fee goes to the platform; the royalty goes to the creator. They are separate charges, and a venue can drop one while keeping the other.

5. Overlooking the buyer's incentive. Buyers save money by avoiding royalties. Any system that relies on buyers voluntarily paying extra faces constant pressure to erode.

Frequently Asked Questions

What is NFT royalties enforcement in simple terms? It is whether the creator fee on a resale actually gets collected and paid. Because most NFTs do not require royalties at the blockchain level, enforcement depended on marketplaces choosing to honor them.

How does NFT royalties enforcement affect investment decisions? For creators, weak enforcement means secondary income may not materialize, so the long-term economics of a collection can differ from what was advertised. For buyers, choosing a zero-royalty venue lowers cost but removes support for the creator.

What is a real-world example of the royalties enforcement debate? In 2022 a token-incentivized marketplace made royalties optional and overtook the incumbent in volume by early 2023. The incumbent responded with an Operator Filter to block non-enforcing venues, then in August 2023 stopped enforcing creator fees on new collections.

How can creators and buyers approach royalties effectively? Creators can use on-chain enforcement standards that build royalty logic into the token rather than relying on marketplace goodwill. Buyers should know that paying a suggested royalty is voluntary on many venues and reflects support for the creator, not a requirement.

How are NFT royalties different from the NFT floor price? A royalty is a fee paid to the creator on each resale. The floor price is the lowest current listing in a collection. Royalties affect what a creator earns; the floor affects what a buyer pays to enter.

Sources

1. Decrypt. "OpenSea Will Make Creator Royalties Optional for NFT Trades." https://decrypt.co/152878/opensea-make-creator-royalties-optional-nft-trades
2. Unchained. "OpenSea Makes Creator Fees Optional, Disables Royalty Enforcement Tool." https://unchainedcrypto.com/opensea-makes-creator-fees-optional-disables-royalty-enforcement-tool/
3. Chainlink Education Hub. "What Is an NFT Floor Price?" https://chain.link/education-hub/what-is-an-nft-floor-price
4. Coinbase Learn. "What Is a NFT Floor Price?" https://www.coinbase.com/learn/crypto-glossary/what-is-an-nft-floor-price

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.