Solana NFT Royalty Structure: From Creator and Holder Perspectives

Royalty is the fee that goes back to original creators whenever NFTs are traded on secondary markets. This system was an important part of the NFT ecosystem, but there has been much debate recently. This guide explores Solana NFT royalty structures in detail.

Basic Concept of Royalties

In traditional art markets, artists don’t profit from resales after selling a work once. NFTs changed this. Through smart contracts, creators can receive profits even from secondary trades.

For example, if an NFT with 10% royalty is resold for 10 SOL, the creator receives 1 SOL. This process happens automatically.

Royalties are typically set between 0% and 10% of the sale price. Most projects set royalties around 5%.

Royalty Issues on Solana

Royalty enforcement on Solana faced different challenges than Ethereum.

Royalties weren’t enforced in early Solana NFT standards. Marketplaces voluntarily collected royalties and forwarded them to creators.

The problem was marketplaces that bypassed royalties emerged. Since buyers could purchase more cheaply without paying royalties, trades flocked to zero-royalty marketplaces.

This caused creator income to plummet, sparking controversy across the entire ecosystem.

Royalty Enforcement

To solve this problem, Metaplex introduced the programmable NFT (pNFT) standard.

pNFT enforces royalty payments at the smart contract level. Trades are only possible through approved marketplaces, and these marketplaces must collect royalties.

Many projects migrated existing NFTs to pNFT. However, this process sometimes caused some functionality limitations.

Royalties from Creator Perspective

For creators, royalties are a continuous revenue stream.

Beyond initial minting revenue, income is generated whenever NFTs are traded. For popular collections, this can be substantial amounts.

Royalty income allows continued project development. It can be reinvested in development, marketing, community events, etc.

However, if royalties are low or nonexistent, long-term project operation becomes difficult. Alternative revenue models must be found or projects scaled back.

Some creators adopt alternative revenue models instead of royalties. These include token issuance, staking fees, partnerships, etc.

Royalties from Holder Perspective

For holders, royalties are both additional costs and a means of project support.

When purchasing NFTs, actual costs increase by the royalty amount. For a 10 SOL NFT with 5% royalty, actual payment is 10.5 SOL.

Royalties are also deducted when selling. If selling for 10 SOL, with 5% royalty and 2% platform fee deducted, you receive about 9.3 SOL.

Paying royalties means providing operating funds to project teams. If teams develop projects with royalties, NFT value can also increase.

Some holders use zero-royalty marketplaces to avoid royalties. While saving costs short-term, it can lead to long-term project weakening.

Two Sides of the Royalty Debate

There are various opinions on royalty enforcement.

Royalty supporters argue creators should receive fair compensation. Royalties enable long-term project development and quality project sustainability.

Royalty opponents argue buyers should have choice. They view forcing additional costs on already purchased NFTs as unreasonable. They also see reduced market efficiency.

Realistically, both perspectives have merit. What matters is each project and holder making choices that suit them.

How to Check Royalties

It’s good to check royalties before trading NFTs.

On Magic Eden, you can check creator royalty rates on collection pages. Royalties are also displayed in expected costs when purchasing.

Tensor similarly displays royalty information. Sometimes there are options to choose whether to pay royalties.

Directly checking a collection’s smart contract shows exact royalty settings.

Royalties and Investment Decisions

Royalties also affect investment decisions.

High royalties (above 7%) are disadvantageous for short-term trading. High costs occur with each trade, reducing margins.

Low royalties (below 3%) are advantageous for trading, but may mean insufficient operating funds for project teams.

Moderate royalties (4-6%) are a balanced choice. Teams can operate and holder burden isn’t excessive.

Don’t judge projects by royalties alone; consider them as one element of overall analysis.

Zero Royalty Collections

Some projects intentionally set royalties to 0%.

Reasons vary: to activate trading, for a holder-friendly image, or because they have alternative revenue models.

Zero royalty doesn’t mean a bad project. However, it’s worth checking how teams secure operating funds.

If alternative revenue models like token issuance, minting revenue, partnerships, commissions exist, sustainability is possible.

Conclusion

Royalties are a complex topic in the NFT ecosystem. It’s important to understand both creator and holder perspectives and check each project’s royalty policy.

As an investor, you can calculate royalties as part of trading costs and use them as an indicator for judging creators’ ongoing participation.

In the next guide, we’ll learn about Solana Compressed NFTs (cNFT).