A royalty is an automated creator fee distributed on secondary market resales, allowing original token creators to earn ongoing revenue whenever their non-fungible token changes ownership.
Enforcement Limits and Marketplace Edge Cases
While many creators assume royalties execute immutably onchain, standard transfer functions in basic token smart contracts do not natively enforce fee collection. In practice, secondary royalties encounter several technical boundaries:
- Offchain Marketplace Discretion: Traditional token transfers do not trigger payment logic. Instead, royalties historically depended on offchain marketplace cooperation, meaning zero-fee trading platforms or direct peer-to-peer transfers could bypass creator payouts entirely.
- Standardization via EIP-2981: Modern NFT collections implement standards such as EIP-2981, which provides a universal method for retrieving royalty payment details across platforms, though final execution still requires marketplace compliance.
- Custom Transfer Restrictions: Some projects use token wrapper contracts or curated transfer allowlists to block interaction with non-enforcing marketplaces, trading composability for enforced fee collection.
Mechanics and Technical Distinctions
When an NFT sells on an exchange that honors creator payouts, the platform reads the specified royalty percentage and recipient address from the smart contract or standard interface. The purchase settlement split automatically directs the agreed proportion of the sale price to the creator's wallet, with the remaining balance allocated to the seller minus applicable marketplace service fees.
Creator royalties differ from primary sale revenue splits and platform fees. Primary sale revenue represents the total initial mint proceeds paid to the issuing entity, whereas a royalty applies strictly to secondary market turnover. Furthermore, platform trading fees fund marketplace operations, while creator royalties reward original rights holders.