Why NFT Royalties Expose the Flaws in Digital Property Law

Code is not law for royalties. Smart contracts enforce logic, not legal rights, which is why marketplaces like Blur and OpenSea can bypass creator fees. The on-chain royalty standard (ERC-2981) is a suggestion, not a mandate.

Digital property rights are broken. An NFT is a tokenized receipt for a JPEG, but the creator's right to a perpetual revenue stream exists only in a social contract. This exposes the flaw in digital ownership where control and monetization are decoupled.

Evidence: Over $300M in creator royalties were paid in 2022, but optional enforcement by major platforms led to a >50% drop in royalty collection rates, proving the system's fragility.

Royalties are a legal construct that smart contracts cannot enforce. A secondary sale royalty is a contractual obligation between creator and buyer, but on-chain code only governs the transfer of the token itself. Platforms like OpenSea and Blur demonstrate this by making royalties optional, shifting enforcement to marketplace policy, not blockchain law.

Code is global, law is local, creating an unenforceable mismatch. A French court ruling on royalties lacks jurisdiction over a pseudonymous trader using a Solana DEX. The EIP-2981 royalty standard is just a signaling mechanism; it cannot compel a wallet to pay.

The flaw is in property definition. An NFT is a receipt for a digital asset, not the asset itself. Copyright law governs the creative work, but the token's transfer is a separate, code-defined event. This decoupling makes on-chain enforcement impossible without centralized gatekeepers.

Evidence: After Blur made royalties optional, creator earnings on Ethereum NFTs fell over 50% within months. This proves that without legal recourse, market forces and code prevail over statutory intent.

On-chain property is unenforceable. An NFT is a pointer to metadata, not a legal title. Marketplaces like Blur and OpenSea removed royalty enforcement, proving that code, not copyright law, governs digital assets.

Sovereignty requires technical primitives. A true network state needs property rights encoded in state transitions. This requires a standard like ERC-721C for enforceable royalties or a sovereign L2 with custom rule-sets.

The flaw is architectural. The Ethereum base layer provides permissionless composability, which inherently breaks walled-garden rules. Royalty enforcement must be a protocol-level feature, not a social contract.

Evidence: Creator royalties on major collections fell over 95% after Blur's policy shift, demonstrating the total failure of off-chain legal constructs to protect on-chain economic interests.

Royalties are legal constructs that require an enforcement mechanism. Blockchains like Ethereum provide immutable provenance but not coercive enforcement. The system's core design rejects centralized authority, making on-chain royalty mandates a logical contradiction.

Marketplaces dictate enforcement, not the protocol. When Blur and OpenSea removed mandatory royalties, they exposed the sovereignty of the marketplace. The smart contract's property record is separate from the commercial terms of its transfer.

ERC-721-C and EIP-2981 are reactive standards attempting to retrofit legal logic. They rely on social consensus and validator compliance, a fragile model proven by the rapid adoption of royalty-optional platforms.

Evidence: After Blur's policy shift in 2023, average creator royalty earnings on major collections fell by over 60%. The market voted with its liquidity, proving code is not law when it conflicts with economic incentives.