The Hidden Cost of Forking Without Royalty Enforcement

Forking is a tax. It redirects value from the original protocol developers to forkers and liquidity mercenaries. This creates a perverse incentive structure where copying is more profitable than innovating, as seen in the proliferation of Uniswap V2 forks on EVM chains.

The cost is protocol stagnation. Developers under-invest in R&D when their work is instantly commoditized. This is the principal-agent problem for open-source crypto, where the public good of code is exploited by private actors like SushiSwap, which forked Uniswap's core logic.

Evidence: The TVL migration from forked protocols back to the originals after incentives dry up proves the value is in the brand and network, not the forked code. Yearn Finance's v2 vault strategies were forked repeatedly, forcing them to innovate on non-forkable contract architecture.

Royalties fund protocol R&D. A fork copies a static snapshot of code, but the original team's ongoing work—security audits, feature development, ecosystem tooling—requires continuous capital. This is the sustainable development loop that royalties enable.

Forking creates a free-rider problem. Projects like Sudoswap and Blur removed royalties to gain market share, but they directly benefit from the liquidity, user education, and network effects built by the original creators (e.g., OpenSea and X2Y2). They capture value without contributing to its creation.

The cost is technical debt. Without funding, the original project cannot pay for critical upgrades. Forks inherit a stale codebase, missing the optimizations and security patches developed later. The ecosystem fragments on inferior, outdated infrastructure.

Evidence: Look at NFT marketplaces. The 2022-23 royalty wars saw forked liquidity aggregators surge, while original platforms that funded the NFT standard's growth (ERC-721) struggled to monetize their innovation. The result is a market racing to the bottom on fees, disincentivizing future foundational work.

Protocols are economic systems, not just code. A fork that strips royalty enforcement or fee switch mechanisms creates a free-rider problem. Developers capture immediate value while externalizing the long-term costs of R&D and security to the original network.

The value accrual breaks. Compare Uniswap v3 (with its fee switch governance control) to a forked instance without it. The fork's treasury lacks the economic engine to fund protocol upgrades, creating a permanent innovation deficit versus the canonical version.

This is a hidden liquidity tax. Validators and LPs on the fork face increased systemic risk from underfunded security and development. The resulting instability makes the forked chain's native asset a weaker collateral asset versus its canonical counterpart, as seen in Ethereum vs. Ethereum Classic dynamics.

Evidence: The Solana NFT ecosystem collapsed after widespread royalty bypass. Creator revenue, which funds continued project development and marketing, dropped over 90% on many collections, demonstrating how removing a core economic primitive destroys the flywheel.

The market is short-sighted. It optimizes for immediate user cost, not long-term protocol sustainability. Projects like Uniswap and OpenSea initially removed creator royalties, creating a race to the bottom for fee extraction that starves core developers.

Forking destroys R&D incentives. The original developer bears the sunk cost of innovation, while forks capture value with zero investment. This dynamic, seen in the Sushiswap/Uniswap fork, creates a perverse system where copying is more profitable than creating.

Royalties are a public good. They fund protocol maintenance, security audits, and future development. Without them, the ecosystem relies on venture capital subsidies or token inflation, which are less sustainable and more centralized than a direct creator-to-user fee flow.

Evidence: The NFT collapse. The 2022-23 NFT bear market demonstrated that zero-royalty marketplaces like Blur did not save the sector; they accelerated its decline by removing the economic model that funded artist communities and sustained long-term project development.

Protocols are not commodities. A fork that copies code but not the original's developer ecosystem and brand equity is a zombie. The value is in the network, not the bytecode.

Royalties enforce a feedback loop. Projects like Uniswap and Aave use fee switches to fund development. Forks that strip this out compete on price alone, creating a race to the bottom for security and innovation.

Sustainable forking requires new primitives. Look at Optimism's RetroPGF or Ethereum's EIP-1559 as models for value redistribution. A fork must bake in a mechanism to reward the original creators or the ecosystem it leeches from.

Evidence: The SushiSwap fork of Uniswap initially succeeded via liquidity bribes but has since bled market share and developer mindshare back to the original, which reinvested fees into its v4 development.