Why Layer 2 Solutions Break Royalty Economics

L2s are sovereign execution environments. Smart contracts enforcing creator royalties on Ethereum mainnet (like EIP-2981) are not natively respected on secondary marketplaces built on L2s. This creates a regulatory arbitrage where high-value NFT trades migrate to zero-fee environments, stripping creators of their primary post-mint revenue stream.

• Key Consequence: Creator revenue from secondary sales can drop to 0% on many L2-native markets.
• Systemic Risk: Undermines the fundamental value proposition of digital ownership and artist sustainability.

The proliferation of L2s and L3s (via Arbitrum Orbit, OP Stack) fractures liquidity and user attention. This dilutes protocol fee capture and exacerbates Maximal Extractable Value (MEV) challenges. Bridges and cross-chain DEXs like LayerZero and Stargate introduce new trust assumptions and latency, creating windows for arbitrage bots that capture value meant for LPs and protocols.

• Key Consequence: Protocol revenue is siphoned by inter-chain MEV and infrastructure intermediaries.
• Systemic Risk: Economic security of applications becomes dependent on bridge security, not just L1 settlement.

L2 sequencers (e.g., Arbitrum, Optimism) batch and order transactions, capturing 100% of the base fee revenue from users. While some have profit-sharing mechanisms (like Optimism's RetroPGF), this centralizes economic value at the infrastructure layer. Application-layer protocols, which drive demand, see their economic moat eroded as their core utility (transactions) becomes a low-margin commodity controlled by a single profit center.

• Key Consequence: Value accrual shifts from dApps to infrastructure, replicating web2 platform dynamics.
• Systemic Risk: Incentives for sequencer decentralization are weak, creating potential rent-seeking bottlenecks.

The fix requires architectural shifts, not just social consensus. Enshrined L2 features (like a native royalty opcode) or shared sequencing layers (like Espresso, Astria) can realign incentives. These create a neutral, decentralized marketplace for block space where application-specific rules (royalties) and fair ordering can be protocolically enforced across the rollup stack.

• Key Benefit: Restores ability for application-layer value capture and creator sustainability.
• Key Benefit: Mitigates cross-domain MEV and re-decentralizes the economic stack.

L2 sequencers (e.g., Arbitrum, Optimism, Base) profit from MEV and transaction ordering. Their primary incentive is to maximize throughput and fee revenue, not enforce creator policy. This creates a natural race to the bottom on fees, where optional royalties are stripped to attract volume.

• Incentive Misalignment: Sequencer profit ≠ creator profit.
• Fee Competition: Marketplaces like Blur exploit this to offer zero-royalty trades.

Each L2 is a sovereign execution environment. An NFT collection's smart contract on Ethereum Mainnet cannot programmatically enforce rules on a separate L1 like Solana or an L2 like Arbitrum Nova. This fragmentation turns royalties from a protocol guarantee into a social contract reliant on individual marketplace compliance.

• Technical Impossibility: L1 contract logic stops at its chain border.
• Fragmented Enforcement: Requires bespoke, often ignored, integration on each new chain.

In a modular stack (e.g., Celestia for DA, EigenLayer for security), the execution layer is decoupled and hyper-optimized for cheap computation. The EVM is not the law here; it's just a virtual machine. Royalty enforcement logic, unless explicitly rebuilt into the application's state transition function, is simply not part of the execution context.

• Architectural Choice: Modularity prioritizes scalability over stateful constraints.
• Application Logic: Enforcement must be re-implemented per-rollup, per-app.

Advanced NFT marketplaces use off-chain order books (like Blur) or intent-based systems (like UniswapX) for efficiency. The trade settlement is the only on-chain component, making it trivial to omit royalty payment logic. The OpenSea Operator Filter attempted to blacklist non-compliant marketplaces but was widely circumvented and retired.

• Execution Minimization: Only settlement hits the chain, stripping auxiliary logic.
• Policy Failure: Blacklists are gameable and create poor UX.