Non-fungible tokens (NFTs) are disrupting the way businesses think about digital assets and revenue generation. NFT offers a unique way to certify ownership and authenticity, but their true power for businesses lies in the embedded concept of royalties. Let's explore how NFT royalties are set to reshape industries.

How does NFT Royalty Work?

NFT offers businesses a path beyond traditional, one-time sales models. NFTs act as unique digital certificates of ownership, enabling asset authentication and streamlined transactions.  A key element in the power of NFTs lies in royalties –  a built-in percentage of each resale automatically going back to the original creator, unlocking a perpetual revenue stream and offering unique advantages for businesses.

NFT Creation and Minting

When a business creates an NFT, it has several key decisions to make:

• Type of Asset: The NFT could represent a digital artwork, a piece of branded content, an exclusive membership token, a limited-edition digital product, or even access to real-world products and experiences.

• Royalty Percentage: Businesses thoughtfully determine the royalty percentage (usually between 2.5% and 10%) that will be embedded within the NFT's smart contract. This percentage should balance income generation with incentivizing resales.

• Smart Contract Standards: Choosing the right smart contract standard (e.g., ERC-721, ERC-1155 on the Ethereum blockchain) is crucial. Standards can influence technical compatibility and royalty enforcement on different platforms.

Primary Sale 

When the NFT is purchased for the first time, the business receives the full sale price. This is similar to a traditional product sale.

Secondary Sales

This is where royalties become a game-changer. Whenever the NFT is resold on a compatible marketplace, the smart contract automatically executes these steps:

• Royalty Calculation: The smart contract instantly calculates the royalty amount based on the resale price and the set percentage.

• Direct Transfer: The royalty is seamlessly deducted from the sale proceeds and transferred directly to the original creator's (the business's) cryptocurrency wallet.

Royalty Enforcement

The key factor determining the effectiveness of NFT royalties is the marketplace where it's listed and traded. Reputable marketplaces will have systems in place to honor and enforce the royalty terms embedded within the smart contract.

Key Business Advantages

1. New Revenue Generation

NFT royalties are a powerful way to open up entirely new revenue streams for businesses. Digital assets that might have had limited earning potential after the initial sale (such as art, collectibles, or even digital experiences) can now generate a passive income stream. This is particularly significant for creative industries.

2. Brand Protection and Control

By embedding royalties, businesses gain a level of long-term control over their intellectual property, even after selling the original NFT. Royalties discourage the creation and trading of unauthorized copies, ensuring the business always benefits from the value associated with its brand.

3. Customer Loyalty and Engagement

NFTs with royalties create a sense of investment and shared ownership for customers. Collectors know each resale contributes back to the business, incentivizing trading and encouraging a sense of community around the brand. This fosters increased brand loyalty and long-term customer engagement.

4. Streamlined Licensing

In industries heavily reliant on licensing, such as music or gaming, NFT royalties can potentially replace complex and time-consuming licensing negotiations. The automatic royalty mechanism simplifies the distribution of earnings, particularly when multiple contributors are involved.

5. Long-term Value Generation

The perpetual nature of NFT royalties means businesses can continue generating income from their creations long after the initial sale. With each resale, the value of the brand and its associated NFTs may potentially increase, allowing the business to share in that growth.

Real-World Business Use Cases

• Luxury Goods: Authentication and Resale Revenue High-end brands like Gucci and Louis Vuitton are exploring NFTs as a means to combat counterfeiting. NFT-linked luxury items (such as digital or physical handbags) carry embedded royalties, guaranteeing authenticity and ensuring the brand receives a portion of the revenue whenever these items are resold. This protects brand reputation and opens up a long-term revenue stream.

• Ticketing: Curbing Scalping and Fan Engagement Ticketmaster has experimented with NFT tickets for select events. Beyond being a unique collectible, these tickets can have royalties programmed in. This means that each time the ticket is resold, a percentage automatically goes back to the event organizers or artists, potentially reducing scalping and creating an ongoing connection with loyal fans.

• Gaming and Metaverse: In-Game Asset Ownership and Monetization Game developers like Axie Infinity are pioneering the use of NFTs to represent in-game assets like characters, weapons, and virtual land. NFT royalties allow creators to continually earn income as these assets are traded between players, ensuring monetization beyond the initial purchase. This incentivizes developers to continue creating new content and expands the in-game economy.

• Music Industry: Fair Compensation and Direct Fan Support Musicians can leverage NFTs linked to songs or albums. Instead of relying solely on streaming platforms, artists potentially earn a royalty each time their NFT music is resold. This offers possibilities for greater compensation and empowers fans to directly support their favorite musicians through ownership and participation in the resale market.

• Memberships & Loyalty Programs: Exclusive Access and Reward Businesses can create NFTs that act as membership tokens, granting access to exclusive content, events, or real-world perks. Embedding royalties ensures that every time these membership NFTs are traded, the business receives a percentage of the revenue, rewarding ongoing loyalty and providing an extra layer of exclusivity.

Considerations and Future Outlook

Businesses need to be aware of a few points before diving into NFT royalties:

• Marketplace Selection: Choose NFT marketplaces that prioritize royalty enforcement, as some platforms are making royalties optional.

• Legal Frameworks: The legal implications around NFT royalties, particularly in certain industries, are still evolving.

• Consumer Sentiment: Some potential ethical concerns around ongoing income for businesses need to be navigated transparently.

Partnering with specialists like TokenMinds can be instrumental in maximizing the potential of your NFT projects. With expertise in NFT development, smart contract implementation, and marketplace strategy, we can guide you through the process, ensuring optimal royalty structures, compliance, and long-term success in the NFT market.

Conclusion

NFT royalties have the potential to revolutionize the business landscape, allowing companies to tap into new revenue streams, reinforce brand control, and build stronger customer relationships. As the NFT sector matures and regulations catch up, royalties will become an increasingly crucial business tool.