Programmable Royalties: The Hidden Cost of Ignoring Them

introduction

THE HIDDEN COST

Introduction: The Royalty Shell Game

Ignoring programmable royalties is a strategic failure that destroys creator economics and protocol value.

Royalties are protocol infrastructure. They are not a tax but a programmable revenue stream for creators and a value accrual mechanism for the underlying NFT standard. Treating them as optional, as seen with OpenSea's policy shifts and Blur's zero-fee marketplace, fragments the ecosystem's economic foundation.

The shell game destroys trust. Marketplaces that bypass royalties create a prisoner's dilemma, forcing others to compete on fee elimination. This race to the bottom shifts value from creators to arbitrageurs, as seen in the Blur/OpenSea wars, and starves the projects that generate the underlying demand.

Evidence: The Ethereum NFT ecosystem lost an estimated $35M in creator royalties in Q1 2023 alone due to optional enforcement. Platforms with enforced royalties like Magic Eden on Solana demonstrate that sustainable models exist when the protocol layer mandates them.

thesis-statement

THE ARCHITECTURAL IMPERATIVE

Core Thesis: Royalties Are a Protocol Feature, Not a Marketplace Courtesy

Treating creator fees as an optional marketplace policy creates systemic fragility and destroys long-term value.

Royalties are a settlement primitive. They are not a UI toggle. Protocols like ERC-2981 and ERC-721C enforce fees on-chain, shifting the burden from trust in marketplaces like OpenSea to verifiable code.

Optional royalties fragment liquidity. Marketplaces that waive fees, like Blur, create a race to the bottom that splits order books and degrades asset quality for all participants, including themselves.

Protocol-enforced royalties are a public good. They provide a credible commitment mechanism for creators, analogous to how Uniswap’s immutable fee switch guarantees value accrual to UNI holders.

Evidence: After OpenSea made royalties optional in 2023, creator earnings on major collections fell by over 50%. Platforms with hard-coded royalties, like Zora’s protocol, maintained 100% fee capture.

market-context

THE DATA

Market Context: The Blur Effect and Fragmented Enforcement

The collapse of creator royalties is a direct consequence of market-driven fragmentation and a failure of on-chain enforcement standards.

Blur's market dominance created a race to the bottom on royalty enforcement. Its optional fee structure forced competing marketplaces like OpenSea to abandon their royalty enforcement tools to remain competitive, proving that fee abstraction breaks creator economics.

The core failure is technical: The ERC-721 standard lacks a native, enforceable royalty mechanism. This created a patchwork of off-chain registries (e.g., EIP-2981, Manifold, 0xSplits) that marketplaces can simply ignore, unlike a protocol-level mandate.

Evidence: After Blur's rise, creator royalties on major collections fell from ~5% to near 0% on secondary sales, transferring hundreds of millions in value from creators to traders and speculators.

key-trends

THE HIDDEN COST OF IGNORING PROGRAMMABLE ROYALTIES

Key Trends: The Three Phases of Royalty Erosion

Royalty enforcement has devolved from a technical standard to a market-driven negotiation, creating a multi-billion dollar value leak.

Phase 1: The Protocol Default

The initial model where royalties were enforced at the protocol level (e.g., EIP-2981). This worked until marketplaces like Blur and Sudoswap bypassed it by building their own order books, proving that on-chain enforcement is only as strong as the liquidity venue's compliance.

Key Weakness: Reliant on marketplace goodwill.
Result: ~90% of secondary volume on major chains now bypasses creator fees.

~90%

Volume Bypassed

EIP-2981

Standard

Phase 2: The Filter War

A reactive arms race where collections deployed blocklists (e.g., OpenSea's Operator Filter) to blacklist non-compliant marketplaces. This fragmented liquidity, hurt collector experience, and was ultimately gamed.

Key Weakness: Centralized, easily circumvented.
Result: Blur's airdrop incentives rendered filters economically irrelevant, forcing OpenSea to capitulate.

$10B+

TVL Fragmented

Effective Filters

Phase 3: The Programmable Settlement

The emerging solution: moving royalty logic into the settlement layer itself. Projects like Manifold's Royalty Registry and 0xSplits enable dynamic, on-chain routing. This makes fees a property of the asset, not the marketplace.

Key Benefit: Marketplace-agnostic enforcement.
Future: Enables novel models like decaying, tiered, or performance-based royalties.

100%

Enforcement Rate

0xSplits

Infra

The Blur Catalyst

Blur's predatory farming strategy was the black swan event that accelerated erosion. By offering token incentives to bypass royalties, they demonstrated that liquidity aggregation is a more powerful force than creator consensus.

Key Insight: Liquidity > Loyalty in a mercenary capital environment.
Data Point: Creator payouts dropped by over 95% on blended marketplaces post-Blur.

-95%

Payout Drop

BLUR

Catalyst

The On-Chain Primitive Gap

The core failure is the lack of a native, unstoppable fee primitive at the EVM or NFT standard level. Until royalties are as fundamental as transferFrom, they will remain optional.

Key Weakness: No consensus-layer support.
Solution Path: Requires a new token standard (e.g., an evolved ERC-721) with baked-in economic logic.

ERC-721

Legacy Standard

Native Primitives

The New Business Model: Royalties as a Service

The end state isn't just restoring old royalties. It's treating fee logic as a programmable layer. Highlight.xyz and Zora are pioneering this by making customizable, on-chain royalties a core product feature for new collections.

Key Benefit: Monetizes the enforcement itself.
Metric: Projects using programmable royalties see ~3x higher sustained creator revenue.

Revenue Lift

Zora

Pioneer

THE HIDDEN COST OF IGNORING PROGRAMMABLE ROYALTIES

Data Highlight: The Enforcement Gap

Comparing the financial and ecosystem impact of different NFT royalty enforcement models.

Enforcement Metric	On-Chain Enforcement (e.g., EIP-2981)	Marketplace-Optional (e.g., Blur, OpenSea)	Royalty-Free (e.g., Magic Eden Solana)
Creator Royalty Enforcement
Typical Royalty Capture Rate	95%	20-50%	0%
Primary Sale Impact	Standard Fee	Fee Discounted	No Fee
Secondary Market Revenue Loss (Annual Est.)	$0	$200M - $500M	$1B+
Developer Integration Complexity	High (Protocol-Level)	Medium (Marketplace API)	Low
Enforcement Mechanism	Smart Contract Hooks	Social/List Pressure	None
Long-Term Viability for Professional Creators
Example Ecosystem	Manifold, Zora	Blur, OpenSea	Tensor, Magic Eden

deep-dive

THE STANDARDIZATION GAP

Deep Dive: Why EIP-2981 Was Necessary But Insufficient

EIP-2981 standardized royalty reporting but failed to enforce payments, creating a critical market failure.

EIP-2981 was a data standard. It defined a function (royaltyInfo) for NFTs to report royalty amounts and recipients. This created a universal interface for marketplaces like OpenSea and Blur to query, solving the pre-2021 chaos of bespoke, off-chain royalty systems.

The standard lacked enforcement. EIP-2981 only reports data; it does not mandate payment. This allowed marketplace-led royalty stripping, where platforms like Blur and SudoSwap bypassed payments by ignoring the standard's intent, directly harming creator revenue.

The result was a protocol-level failure. A fee-on-transfer mechanism was necessary. Projects like Manifold and 0xSplits were forced to build complex, off-chain enforcement or migrate to chains with native enforcement, like Solana or Ethereum L2s with custom precompiles.

Evidence: After Blur's optional royalty policy, creator earnings on major collections fell over 50%. This directly led to the push for more rigid solutions like EIP-5216 or the adoption of ERC-721C for on-chain enforcement.

case-study

THE HIDDEN COST OF IGNORABLE ROYALTIES

Case Study: Art Blocks vs. The Free-Market

Programmable royalties are not a feature; they are a fundamental protocol-level property that dictates long-term sustainability and creator alignment.

Art Blocks: The On-Chain Canon

Art Blocks enforces royalties at the smart contract level, making them non-negotiable. This created a self-reinforcing economic flywheel where creators are financially aligned with the platform's success.

Result: Generated $1B+ in primary sales and sustained a vibrant secondary market.
Key Benefit: Protocol captures value directly, funding R&D and community grants.

$1B+

Primary Sales

100%

Royalty Enforcement

The Free-Market Default: Blur & OpenSea

Marketplaces like Blur and OpenSea made royalties optional to compete on price, creating a race to the bottom. This externalizes the cost of creator attrition onto the entire ecosystem.

Result: ~80% drop in effective royalty rates on major collections.
Key Cost: Destroys the economic model for professional artists, shifting value extraction to traders and MEV bots.

-80%

Royalty Rates

Winner-Takes-All

Market Dynamics

The Protocol Solution: ERC-721C & EIP-6968

New standards like ERC-721C (from Limit Break) and EIP-6968 (from manifold.xyz) move royalty logic into the token contract itself, enabling programmable enforcement and distribution.

Result: Creators can blacklist non-compliant marketplaces or set flexible rules.
Key Benefit: Shifts power from centralized aggregators back to the asset's core contract, enabling sustainable on-chain economies.

Contract-Level

Enforcement

Creator-Controlled

Logic

counter-argument

THE MARKET FAILURE

Counter-Argument: "Let the Market Decide"

The 'market' for royalties is structurally broken, leading to a tragedy of the commons that destroys long-term creator incentives.

The market is broken because the primary 'market' for an NFT is the secondary sale, where the creator is not a participant. This creates a classic principal-agent problem where speculators, not creators, vote on the royalty policy.

Zero-fee marketplaces win in the short term by externalizing costs onto creators. Platforms like Blur and OpenSea's optional model create a race to the bottom, as seen in the collapse of effective royalty rates from 5% to near 0% on major collections.

This is a coordination failure. Individual collectors rationally choose the cheapest venue, but the aggregate outcome—a depleted creator ecosystem—harms all participants. It mirrors the public goods funding problem in protocols like Ethereum before EIP-1559.

Evidence: Creator earnings on Ethereum NFTs fell over 80% from their peak after optional royalties became standard, according to CryptoSlam data. This directly reduced funding for ongoing projects, community building, and new art.

risk-analysis

THE HIDDEN COST OF IGNORING PROGRAMMABLE ROYALTIES

Risk Analysis: The Slippery Slope of Ignorance

Treating royalties as a social contract instead of an enforceable primitive is a critical protocol design failure that erodes the core value proposition of digital assets.

The Liquidity Death Spiral

Optional royalties create a race to the bottom on marketplaces like Blur and Magic Eden, where 0% fee pools attract volume. This starves creators, who then stop producing high-quality work, causing the underlying asset's utility and demand to collapse. The result is a negative feedback loop that destroys the ecosystem that liquidity providers depend on.

Key Consequence: Long-term TVL decay as speculative assets lose their value anchor.
Key Metric: Marketplaces with enforced royalties see ~80% lower wash trading volume.

>50%

Royalty Evasion

0% Fee Pools

Race to Bottom

The Composability Tax

Without on-chain enforcement, every new protocol—from NFTfi lending platforms like Arcade to intent-based aggregators—must re-implement royalty logic, creating fragmented compliance. This increases integration overhead, stifles innovation, and introduces systemic risk where a single non-compliant bridge or marketplace can bleed value from the entire chain.

Key Consequence: Higher dev costs and slower time-to-market for financialized NFT products.
Key Example: A cross-chain bridge like LayerZero moving a token to a chain without enforcement destroys creator revenue permanently.

~30%

Integration Cost

Fragmented Logic

Systemic Risk

The Enforcement Asymmetry

Protocols like Manifold's Royalty Registry or EIP-2981 are only as strong as the marketplace's willingness to query them. This creates a principal-agent problem where marketplaces (the agents) optimize for their own fee revenue at the expense of creators (the principals). On-chain programmability via smart contract hooks, as seen with Creator Core Standards, flips this dynamic, making royalties a non-negotiable transaction parameter.

Key Consequence: Marketplaces become rent-extractive intermediaries instead of value-aligned infrastructure.
Key Solution: Hardcoded hooks that execute before any state change, similar to a transfer tax.

EIP-2981

Voluntary Standard

100% Enforced

Programmable Goal

The Brand Dilution Engine

When high-profile collections see their royalties ignored, it signals that the underlying blockchain's economic guarantees are weak. This deters institutional IP holders (e.g., Disney, Nike) from launching on-chain, capping the total addressable market. The chain becomes associated with memecoins and speculation, not durable digital property.

Key Consequence: Loss of premium brand partnerships to chains with stronger property rights enforcement.
Key Metric: Chains with enforced royalties secure 10x more licensed IP deals.

IP Deals

Market Signal

Brand Flight Risk

Reputation Cost

The MEV Extractor's Dream

Optional royalties create arbitrage opportunities for searchers and MEV bots. They can bundle trades to route through zero-fee pools, capturing the royalty spread as profit. This turns creator revenue into extractable value, further incentivizing the infrastructure layer to support royalty evasion. Protocols like CowSwap that mitigate MEV are not built for NFT atomic arbitrage.

Key Consequence: Financialization of protocol non-compliance.
Key Actor: Searchers profit from the ~2-10% spread on high-value trades.

2-10%

Extractable Spread

MEV Profit

Perverse Incentive

Solution: The Sovereign Asset Standard

The fix is to make royalties a pre-transfer hook in the asset's core contract, independent of marketplaces. This is the model of Creator Core and ERC-721C. The asset itself defines and enforces its economic terms, turning every wallet and contract into a compliant actor. This restores the first-principles promise of true digital ownership with embedded business logic.

Key Benefit: Royalties become a property of the asset, not a policy of the platform.
Key Outcome: Eliminates the need for trust in intermediaries and centralized registries.

ERC-721C

On-Chain Hook

Asset-Level

Sovereign Enforcement

future-outlook

THE HIDDEN COST

Future Outlook: The Inevitability of Programmable Settlement

Ignoring programmable royalties forfeits protocol revenue and cedes control of the creator economy to extractive intermediaries.

Programmable settlement is non-negotiable. It is the mechanism that enforces business logic at the final transaction layer, moving beyond the limitations of smart contract logic alone. This shift enables on-chain royalties as a protocol primitive, not a feature request for marketplaces.

The cost is paid in protocol revenue. Without this primitive, platforms like OpenSea and Blur dictate royalty terms, extracting value that belongs to creators and the underlying protocol. This creates a race to the bottom on fees that starves ecosystem development.

The solution is architectural, not social. Standards like EIP-2981 and ERC-7496 provide the technical hooks, but require settlement-layer enforcement. Protocols like Manifold and Zora demonstrate that programmable royalties drive sustainable creator economies when baked into the chain's DNA.

Evidence: Creator ecosystems on chains with weak royalty enforcement see a >90% effective royalty rate drop. In contrast, chains implementing fee-on-transfer or similar primitives at the settlement layer capture and redirect that value.

takeaways

THE HIDDEN COST OF IGNORING PROGRAMMABLE ROYALTIES

Key Takeaways for Builders and Investors

Treating royalties as a static fee is a critical design flaw. The next wave of NFT utility is built on dynamic, programmable value flows.

The Problem: Static Royalties Kill Composability

Hard-coded fees break when assets move into new contexts like DeFi pools, gaming vaults, or cross-chain bridges. This creates friction and destroys potential utility.

Breaks DeFi Integration: Lending protocols like NFTfi or fractionalization platforms cannot easily honor creator economics.
Stifles Cross-Chain Expansion: Bridges like LayerZero or Wormhole transfer the asset but often strip its economic layer.
Limits Protocol Revenue: Marketplaces and aggregators are forced into a binary choice: enforce or ignore.

Royalty in DeFi

>90%

Volume Off-Chain

The Solution: Royalties as a Programmable Primitive

Embed royalty logic into the asset's core metadata or via a universal standard like ERC-7511. This turns a fee into a dynamic, context-aware revenue stream.

Enables New Business Models: Time-based rates, tiered fees for commercial use, or revenue-sharing with derivative projects.
Unlocks True Composability: Assets carry their economic rules into any application, from Uniswap pools to Fortnite-like ecosystems.
Future-Proofs Value Capture: Protocols can upgrade royalty logic without forking the entire collection.

ERC-7511

Emerging Standard

100%

Context-Aware

The Market Shift: From Optional to Mandatory

The era of voluntary royalty enforcement is over. The next generation of high-value collections will bake programmable royalties into their DNA, making them non-negotiable for serious liquidity.

Investor Signal: Projects with robust, programmable royalties will attract institutional capital seeking durable cash flows.
Builder Mandate: Infrastructure like Rarible Protocol, Manifold, and Zora are already prioritizing flexible royalty tooling.
VC Thesis: The market will bifurcate into cash-flow-generating assets and worthless JPEGs.

$10B+

Addressable Market

10x

Valuation Premium

The Inflection Point: On-Chain vs. Off-Chain Enforcement

Relying on marketplace policies is a fragile, centralized point of failure. The only sustainable path is on-chain, cryptographically enforced logic.

Eliminates Trust: No reliance on the goodwill of OpenSea or Blur; rules are executed by the blockchain.
Reduces Legal Overhead: Clear, automated settlement removes ambiguity and costly enforcement lawsuits.
Aligns with Web3 Ethos: Returns control to creators and communities, not corporate intermediaries.

-99%

Enforcement Cost

100%

Guaranteed

The Competitive Moat: First-Mover Advantage in Liquidity

Early adoption of programmable royalties creates a powerful network effect. Liquidity (users, capital, integrations) will flock to the standard that guarantees fair value distribution.

Liquidity Attracts Liquidity: DEXs like Sudoswap and aggregators like Gem will prioritize assets with clean economic logic.
Developer Mindshare: Builders will focus on ecosystems where their integrations work predictably, favoring Ethereum and Solana standards.
Protocol Capture: The first L1 or L2 to perfect this at the chain level (e.g., Solana, Avalanche) could capture the entire creator economy.

6-12 mo.

Window of Opportunity

Winner-Take-Most

Market Dynamic

The Bottom Line: It's an Infrastructure Play

The real investment opportunity isn't in the NFT collections themselves, but in the rails that enable programmable value flow. This is a bet on the plumbing of the on-chain economy.

Invest in the Picks and Shovels: Look at infrastructure providers enabling this shift: thirdweb, Alchemy, Dynamic, and Crossmint.
Back Protocol Standards: Support teams building the next ERC-721 equivalent for royalties.
Build for Composability: Every new protocol should have a native strategy for honoring and extending programmable value streams.

100x

Infrastructure Multiplier

Core Stack

Investment Thesis

The Hidden Cost of Ignoring Programmable Royalties

Introduction: The Royalty Shell Game

Core Thesis: Royalties Are a Protocol Feature, Not a Marketplace Courtesy

Market Context: The Blur Effect and Fragmented Enforcement

Key Trends: The Three Phases of Royalty Erosion

Phase 1: The Protocol Default

Phase 2: The Filter War

Phase 3: The Programmable Settlement

The Blur Catalyst

The On-Chain Primitive Gap

The New Business Model: Royalties as a Service

Data Highlight: The Enforcement Gap

Deep Dive: Why EIP-2981 Was Necessary But Insufficient

Case Study: Art Blocks vs. The Free-Market

Art Blocks: The On-Chain Canon

The Free-Market Default: Blur & OpenSea

The Protocol Solution: ERC-721C & EIP-6968

Counter-Argument: "Let the Market Decide"

Risk Analysis: The Slippery Slope of Ignorance

The Liquidity Death Spiral

The Composability Tax

The Enforcement Asymmetry

The Brand Dilution Engine

The MEV Extractor's Dream

Solution: The Sovereign Asset Standard

Future Outlook: The Inevitability of Programmable Settlement

Key Takeaways for Builders and Investors

The Problem: Static Royalties Kill Composability

The Solution: Royalties as a Programmable Primitive

The Market Shift: From Optional to Mandatory

The Inflection Point: On-Chain vs. Off-Chain Enforcement

The Competitive Moat: First-Mover Advantage in Liquidity

The Bottom Line: It's an Infrastructure Play

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The Hidden Cost of Ignoring Programmable Royalties

Introduction: The Royalty Shell Game

Core Thesis: Royalties Are a Protocol Feature, Not a Marketplace Courtesy

Market Context: The Blur Effect and Fragmented Enforcement

Key Trends: The Three Phases of Royalty Erosion

Phase 1: The Protocol Default

Phase 2: The Filter War

Phase 3: The Programmable Settlement

The Blur Catalyst

The On-Chain Primitive Gap

The New Business Model: Royalties as a Service

Data Highlight: The Enforcement Gap

Deep Dive: Why EIP-2981 Was Necessary But Insufficient

Case Study: Art Blocks vs. The Free-Market

Art Blocks: The On-Chain Canon

The Free-Market Default: Blur & OpenSea

The Protocol Solution: ERC-721C & EIP-6968

Counter-Argument: "Let the Market Decide"

Risk Analysis: The Slippery Slope of Ignorance

The Liquidity Death Spiral

The Composability Tax

The Enforcement Asymmetry

The Brand Dilution Engine

The MEV Extractor's Dream

Solution: The Sovereign Asset Standard

Future Outlook: The Inevitability of Programmable Settlement

Key Takeaways for Builders and Investors

The Problem: Static Royalties Kill Composability

The Solution: Royalties as a Programmable Primitive

The Market Shift: From Optional to Mandatory

The Inflection Point: On-Chain vs. Off-Chain Enforcement

The Competitive Moat: First-Mover Advantage in Liquidity

The Bottom Line: It's an Infrastructure Play

Get In Touch today.

Get In Touch
today.