Why On-Chain Royalties Are a Governance Nightmare

Royalty enforcement is a governance problem. It forces marketplaces like OpenSea and Blur to choose between honoring creator terms and optimizing for user experience and liquidity, a conflict that fragments protocol-level standards.

Smart contracts cannot enforce social consensus. The EIP-2981 royalty standard is a request, not a rule, because decentralized platforms cannot mandate fee logic on immutable, user-controlled assets without centralizing control.

The result is a prisoner's dilemma. Marketplaces that waive fees, like Blur, gain volume at the expense of creators, forcing competitors to defect from the cooperative norm or lose market share.

Evidence: After Blur's optional royalties, creator earnings on major collections dropped over 50%, proving that on-chain economic policy is dictated by the most permissive actor.

Royalties are a governance primitive. They require a protocol-level rule to enforce payment, which is a direct intervention in the property rights of the token holder. This creates an inherent conflict between the creator's right to revenue and the user's right to freely transact their asset, a tension that marketplaces like Blur and OpenSea have weaponized.

Enforcement requires censorship. To be effective, a royalty mechanism must censor or penalize non-compliant trades. This forces platforms to become arbiters of validity, moving away from neutral infrastructure. Standards like EIP-2981 are suggestions, not mandates, because the base layer (EVM) cannot natively enforce them without breaking core composability assumptions.

The market has already voted. The shift to optional royalties, led by market dynamics on Blur and Sudoswap, proves that users and liquidity prioritize efficiency over creator mandates. This is a governance failure; a rule the network cannot consistently enforce will be arbitraged away, as seen in the royalty wars of 2022-2023.

Royalty enforcement is impossible without platform-level coordination. The fungibility of NFT transfers on a base layer like Ethereum means a smart contract cannot distinguish a legitimate sale from a simple wallet-to-wallet transfer, creating an inherent technical loophole.

Marketplaces are the new governors. Platforms like Blur and OpenSea now dictate royalty policy through centralized filter lists and blocklists, creating a fragmented enforcement landscape where creator revenue depends on platform politics, not protocol rules.

The EIP-2981 standard is toothless. This royalty standard is a signaling mechanism, not an enforcement one. Marketplaces like Sudoswap and Magic Eden on Solana demonstrate that compliance is optional, rendering the standard ineffective without coercive platform integration.

Evidence: After Blur's aggressive fee model, creator royalties on major Ethereum collections fell from a consistent 5-10% to near 0% on secondary markets, proving that economic incentives trump social consensus in a permissionless environment.

Royalties are governance primitives. A creator's royalty is not a static fee; it is a continuous, on-chain vote on the value of their work, executed via a smart contract's transfer logic. This makes the royalty percentage a direct governance parameter, subject to attack.

The attack surface is the marketplace. Protocols like Blur and OpenSea have demonstrated that marketplaces, not the NFT contract itself, often control fee enforcement. This creates a principal-agent problem where platform incentives (volume) directly conflict with creator incentives (royalties).

Hostile forks are inevitable. When a creator's preferred royalty terms conflict with a marketplace's business model, the marketplace will fork the standard. The ERC-721C standard attempted to solve this with allowlists, but it merely shifts the battle to control of the allowlist signer, a new centralization vector.

Evidence: The Blur marketplace's aggressive zero-fee policy forced OpenSea to suspend its mandatory royalty enforcement tool, the Operator Filter, demonstrating how market competition dismantles on-chain legal constructs. Royalty revenue for major collections dropped over 80% post-filter removal.

Royalties are a governance primitive. They are not a simple fee but a persistent policy enforced by smart contract logic, creating a direct conflict with the user's right to exit and transact freely on a permissionless base layer.

Protocols like Manifold and Zora treat royalties as a creator-defined rule, but marketplaces like Blur and OpenSea treat them as optional to compete for liquidity. This is not a bug but a feature of composability where no single actor controls the stack.

The EIP-2981 standard is a proposal, not a mandate. Its optional adoption proves that on-chain enforcement requires consensus, which fragments across marketplaces, aggregators, and individual wallets, making universal compliance a coordination impossibility.

Evidence: Look at the Solana ecosystem. After Magic Eden enforced royalties, its market share dropped as traders migrated to Tensor and Hadeswap, proving that market forces, not code, dictate the final settlement layer for value.