Why On-Chain Royalties Are a Governance Problem, Not a Tech One

Royalties are a policy, not a protocol feature. The core issue is a governance failure where marketplaces like Blur and OpenSea compete by removing creator fees, creating a race to the bottom that no smart contract can solve.

Technical enforcement is trivial but economically fragile. Standards like EIP-2981 define the royalty interface, but a marketplace can simply ignore it, as seen with Blur's optional royalty model that shifted market share.

The real conflict is jurisdictional. The on-chain execution layer cannot enforce off-chain business logic without consensus, creating a permanent gap between creator intent and marketplace implementation.

Evidence: After Blur's policy shift, creator royalty payments on major collections like Bored Ape Yacht Club fell by over 60%, proving that market forces override code when governance is absent.

ERC-721 is incomplete. The standard defines token ownership but not a mandatory revenue path, outsourcing royalty logic to secondary markets like OpenSea and Blur. This created a marketplace oligopoly with misaligned incentives to capture volume by removing fees.

The problem is social, not technical. Enforcing royalties requires consensus on a new standard, like ERC-2981, but adoption is a coordination game. Individual marketplaces defect to gain competitive advantage, creating a prisoner's dilemma that protocols like Manifold cannot solve unilaterally.

Evidence: Look at the data. After Blur's zero-royalty policy, OpenSea suspended enforcement on most collections, causing creator earnings on major platforms to plummet by over 90%. The technical solution exists; the governance will to enforce it does not.

Royalty enforcement is a coordination problem. The ERC-721 standard intentionally omitted creator fees, delegating the logic to marketplaces. This created a governance vacuum where platforms like Blur and OpenSea compete on trader costs, not creator protection.

Marketplaces optimize for liquidity, not fairness. A platform that enforces royalties loses traders to a competitor that bypasses them. This prisoner's dilemma forces a race to the bottom, as seen in Blur's zero-fee bidding wars that eroded OpenSea's policy.

Technical solutions exist but lack adoption. Standards like EIP-2981 (royalty standard) and ERC-721C (modular transfer logic) enable enforceable fees. The failure is social consensus, not code. No major marketplace coalition has enforced them universally.

Evidence: After OpenSea's optional royalty policy in 2022, creator earnings on major collections like Bored Ape Yacht Club dropped by over 50% on secondary sales, demonstrating the immediate impact of governance failure.

Royalty enforcement is governance. The technical capability to enforce royalties via EIP-2981 or custom transfer logic exists, but its adoption is a collective action problem. Individual marketplaces like Blur and OpenSea optimize for liquidity and trader fees, creating a prisoner's dilemma where defection (removing royalties) is the dominant short-term strategy.

The core failure is jurisdictional. Creator-controlled smart contracts govern token creation, but secondary sales occur on marketplace-controlled settlement layers. This creates a sovereignty conflict where the entity setting the rules (the creator) lacks the power to enforce them on the sovereign territory of the exchange.

Protocols like Manifold and Zora attempted to solve this with technical hooks, but these are optional for marketplaces to integrate. The real-world evidence is the rapid royalty erosion on major EVM chains post-Blur's ascent, proving that without a unified social or economic layer, technical solutions are irrelevant.

Royalties are a policy choice. The core issue is not technical feasibility but market consensus. Protocols like OpenSea and Blur demonstrate that marketplaces, not smart contracts, dictate final settlement terms.

Code cannot enforce social contracts. The EIP-2981 standard is a proposal, not a mandate. Competing market logic from Magic Eden and Tensor proves that royalty adherence is a competitive feature, not a blockchain primitive.

The data is conclusive. Market share shifted to platforms with optional royalties. This is a governance failure where creator DAOs and NFT projects could not coordinate to enforce their preferred economic terms.