NFT Royalty Structure
The ability to support royalty payments is a clear and enticing feature of Non-Fungible Tokens (NFTs). NFT royalty payments are permanent and are executed automatically using smart contracts. If a royalty rate is set, the smart contract ensures that the terms of the NFT is fulfilled and the original owner of this digital asset is paid a percentage of the sale price. It is not uncommon for marketplaces to allow artistes determine their royalty percentages at the time of minting the work.
For example, if an artist creates an artwork and mints it on OpenSea, a fan of the artwork can purchase same for 2ETH (depending on the bids on the artwork the timeline to receive same). The creator of the art earns 2ETH. At the point of minting the artwork as an NFT, the smart contract may contain a term that states that if and when secondary sale occurs, the artiste receives 10% of the revenues. (depending on the terms of use of the marketplace). If the smart contract is setup this way, the royalties begin with each resale. With NFTs royalties, artists earn from every sale of their work for as long as it sells.
EIP 2981
EIP-2981 is an open royalty standard that communicates to players in NFTs marketplaces, the royalty payment information for a specific NFT or collection of NFTs.
Before the implementation of this standard, an open royalty payment standard did not exist in NFTs marketplaces. Generally, with NFT standards (ERC-721/ERC-1155), marketplaces have been able to easily transfer ownership of NFTs between different collectors at every point of sale. However, because information regarding royalties is retained by these marketplaces and was often not shared, an NFT may be taken off a marketplace and then sold in another, and the creator of the NFT would not earn the royalties that they are entitled to.
Here is why;
The sale of an NFT on a marketplace is executed upon the completion of these two actions:
- The buyer transfer funds to the seller.
- The seller transfers the NFT to the buyer.
As the only one who can validate the terms of sale, the market place would ensure that the amount to be paid for the NFT and the NFT to be sold is agreed by the parties. Hence, the marketplace is the one in charge and in the know of the proportion of funds to be distributed to the NFT creator as royalties. Also, pre-existing NFT smart contracts (ERC-721/ERC-1155) could not determine whether a simple transfer of an NFT from an address to another was a mere transfer or an actual sale.
Rationale for EIP-2981
There are a few reasons for the adoption of a standardized solution for sharing information about the royalties to be paid out when a sale is made on an NFT. One of such is to ensure that when onward sales are made on an NFT, the royalties that accrue to the creator on that particular NFT or collection of NFTs are made to a single payment address that belongs to the creator. Prior to the adoption of EIP-2981, when the onward/secondary sale of an NFT is to be executed on a different platform, the ERC721/1155 standards could not enforce payment of royalties as information on what amount to be paid to be as royalties is not shared. The implementation of EIP-2981 standard ensures that information concerning royalties payment is shared and a single address where same is to be remitted is known.
In addition to this, the implementation of the EIP-2981 standard guarantees royalty payment across all marketplaces, both on-chain and off-chain. With the existence of an on-chain royalty payment percentage calculation function within the standard, creators are ensured of getting all accruing royalties on all secondary sales across on-chain and off-chain marketplaces. This ensures universal royalty payment.
Use Cases for EIP-2981
With the implementation of the EIP-2981 standard, a fixed percentage of royalties on secondary sales of NFTs is payable to the creators of the NFTs. It will allow for the specification of the amount to be paid as royalties to the creator of an NFT after each secondary sale and same is paid on all on-chain and off-chain transactions in relation of the NFT.
Finally, it the adoption of EIP-2981 can allow artistes to implement a model for a flexible royalty structure that is subject to change based on frequency of secondary sales and sale amount. With a standardized model for royalty payment, creators can for example upgrade royalties payable depending on frequency of secondary sales and sale amount. They can also choose to not receive royalties if artwork is sold for less than a specified amount.