The Future of NFT Royalties: Enforced by Smart Contract Design

Marketplaces like Blur and Magic Eden's optional model created a race to the bottom, slashing creator revenue. Royalty payments collapsed from ~5% to often 0% on major collections, destroying a $1B+ annual creator economy. This commoditized NFTs and broke the fundamental value proposition for artists.

Smart contracts must enforce royalties at the protocol level, removing marketplace discretion. The dominant technical paths are:\n- EIP-2981: A universal royalty standard for simple, backward-compatible payments.\n- Transfer Hooks: Advanced logic (e.g., Seaport) that can block non-compliant trades or apply fees directly.

Enforcement creates a liquidity split: compliant marketplaces (e.g., new OpenSea filter) vs. non-compliant ones. This mirrors the Uniswap v2/v3 liquidity wars. The winning design will balance creator rights with trader convenience, likely through hybrid models like graduated fees or blocklist/allowlist systems used by Manifold and Art Blocks.

Marketplace competition and EIP-2981's optionality created a race to zero, with ~80% of secondary volume on zero-fee platforms by late 2023. Creator revenue became a voluntary donation.

• Result: Billions in potential royalties left on the table.
• Root Cause: Fee logic resided in the marketplace, not the asset.

Pioneered by Limit Break, this standard puts royalty logic in the NFT contract itself, allowing creators to whitelist compliant marketplaces.

• Mechanism: Transfers to non-whitelisted addresses can be blocked or taxed.
• Adoption: Adopted by major collections like DigiDaigaku, creating a $500M+ enforcement moat.
• Trade-off: Introduces transfer restrictions, a contentious but effective lever.

Blur's protocol-level solution uses a global transfer hook that intercepts all trades on its AMM. Royalties are enforced before settlement.

• Key Insight: Centralizes enforcement at the pool level, not per NFT contract.
• Scale: Governs billions in liquidity across collections.
• Critique: Consolidates power in a single protocol, creating ecosystem dependency.

New L1s and L2s are baking royalties into the chain's transaction logic. Solana's state compression and Arbitrum Stylus enable cheap, universal checks.

• Vision: Royalty enforcement becomes a network-level feature, not an add-on.
• Benefit: Eliminates marketplace fragmentation and gas overhead for checks.
• Players: Monad, Sei, and Aptos are exploring similar VM-level integrations.

Optional royalties on major exchanges like Blur and OpenSea created a race to the bottom, slashing creator income by >50% on secondary sales. Reliance on centralized policy is a critical failure mode.

• Market Failure: Royalties dropped from ~5-10% to 0.5% or zero.
• Architectural Flaw: Enforcement was a social layer, not a protocol primitive.

Protocols like Manifold's Royalty Registry and EIP-2981 embed royalty logic in the NFT contract itself, making it a property of the asset, not the marketplace.

• Universal Enforcement: Any compliant marketplace (e.g., Foundation, Zora) must respect the on-chain rate.
• First-Principles Design: Treats royalties as an inherent, non-bypassable right, similar to a tax on state transitions.

Enforced royalties can fragment liquidity; traders migrate to zero-fee venues. The winning design will balance creator rights with seamless composability across Uniswap, Blur, and aggregators.

• Liquidity Risk: Strict enforcement may push volume to non-compliant pools.
• Architect's Dilemma: Design must not break the fungibility or free transfer of the underlying ERC-721 asset.

Next-gen NFTs use smart contract hooks (inspired by Uniswap V4) to execute complex logic on transfer, enabling dynamic, context-aware royalty schemes far beyond a static percentage.

• Dynamic Rates: Royalties can adjust based on sale price, holder tenure, or DAO votes.
• Automated Splits: Direct, gas-efficient payments to multiple recipients (creators, co-creators, DAOs) in one tx.

The value accrual shifts from generic marketplaces to the royalty enforcement layer and the developer tools that enable it. Invest in primitives, not platforms.

• Protocol Layer Capture: Value moves to standards (EIP-2981), registries, and modular hook systems.
• Tooling Moats: SDKs and no-code platforms that let creators deploy enforceable contracts easily.

If on-chain enforcement is deemed a restrictive practice or violates securities laws, the entire model collapses. The design must be robust enough to withstand legal scrutiny.

• Regulatory Risk: Could be viewed as an unregistered security feature or anti-competitive.
• Defensive Design: Architect systems with upgradeability paths or modular compliance layers.