How Do NFTs Make Money for Creators and Owners?

Non-Fungible Tokens (NFTs) are unique digital assets recorded on a blockchain. They represent ownership of specific digital items like art, music, or collectibles, establishing verifiable scarcity. Unlike traditional cryptocurrencies, each NFT has distinct characteristics and cannot be exchanged on a one-to-one basis. This article explores how NFTs generate revenue for creators and owners.

Initial Sales and Minting

NFT creators earn revenue from initial sales. This process, called “minting,” involves publishing a digital item onto a blockchain, creating its unique record of authenticity and ownership. Minting transforms a digital file into a verifiable digital asset that can be tracked and traded securely.

Creators employ various strategies for these initial sales. Direct sales allow creators to set a fixed price for their NFTs, offering a straightforward purchase option. Auction sales provide dynamic pricing, with English auctions driving prices up through competitive bidding, while Dutch auctions start at a high price and gradually decrease until a buyer is found. Collection drops involve releasing multiple NFTs from a series, often incorporating mechanisms like whitelists for early access or public sales.

Pricing strategies for initial sales consider factors such as perceived value, creator reputation, market demand, and NFT exclusivity. While minting an NFT incurs a computational cost, known as a “gas fee” on some blockchain networks, the potential return from a successful sale can significantly outweigh this initial expense.

Secondary Market Transactions

NFTs generate revenue beyond initial sales through secondary market transactions. Both creators and owners can profit from resales, facilitated by major NFT marketplaces such as OpenSea, LooksRare, and Rarible.

Creators monetize secondary sales through royalties. They can program a percentage royalty into their NFTs, ranging from 2.5% to 10% of the sale price, automatically paid upon resale. Smart contracts on the blockchain enforce this continuous income stream, ensuring creators receive a portion of subsequent sales. For instance, if a creator sets a 10% royalty and their NFT sells for $1,000, they receive $100; if resold later for $2,000, they receive an additional $200.

NFT owners can realize capital gains by selling their NFTs for a higher price than their purchase cost. The Internal Revenue Service (IRS) classifies NFTs as “digital assets,” subjecting them to capital gains tax rules similar to other property. Tax rates depend on the holding period: short-term gains (one year or less) are taxed at ordinary income rates (10-37%), while long-term gains (over a year) typically have lower rates (0-20%). If an NFT is deemed a “collectible” by the IRS, long-term gains may be subject to a higher rate, potentially up to 28%. The IRS applies a “look-through analysis” to determine if an NFT represents an underlying collectible item.

Several factors influence an NFT’s value in the secondary market. Scarcity and uniqueness contribute to higher prices, as do the reputation and significance of the original creator. Demand and popularity, often fueled by community engagement and market sentiment, can lead to bidding wars and increased value. Overall market trends and the utility offered by the NFT also play a role in its financial potential.

Utility-Driven Monetization

NFT owners can generate income without selling their assets by leveraging the NFT’s utility or benefits. This approach offers various avenues for passive income and enhanced value. Utility NFTs often provide perks such as group membership, new in-game powers, or real-world benefits.

One method is staking NFTs, which involves locking them on a platform or protocol to earn rewards over time. This process is similar to staking traditional cryptocurrencies, where users commit assets to support network operations and receive additional tokens or incentives. Staking allows owners to generate passive income from idle digital collectibles, increasing their utility and value.

Another monetization strategy is lending NFTs. Platforms exist that enable NFT owners to temporarily lend their NFTs to others for a fee, generating passive income. This can be structured through peer-to-peer agreements or peer-to-protocol systems, where the NFT serves as collateral for a loan. Borrowers might use these NFTs for in-game activities or access, while lenders earn interest on the loan. Loan amounts can range up to 50% of the NFT’s value, with interest rates varying from 20% to 80%, depending on the asset’s popularity.

Play-to-Earn (P2E) and GameFi models integrate NFTs into blockchain games, allowing players to earn in-game assets, cryptocurrency, or other NFTs through gameplay. Players can monetize their time and skills by completing tasks, winning battles, or trading in-game items. These earned digital assets can then be sold or traded on secondary marketplaces, converting gaming achievements into real-world value.

Beyond direct earning models, NFTs can grant access to exclusive communities, events, content, or real-world benefits. While not always a direct cash payout, these utilities can significantly increase an NFT’s perceived value and demand. This enhanced utility can indirectly contribute to the NFT’s financial potential if the owner decides to resell it, as the added benefits make the asset more desirable.