Royalties are a governance primitive. They create a direct, verifiable economic link between a protocol's success and its stakeholders, aligning incentives more precisely than token voting alone.
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Why On-Chain Royalties Are a Governance Primitive
Moving beyond the NFT marketplace wars, this analysis argues that programmable, on-chain revenue splits are a critical primitive for coordinating value distribution in DAOs, collaboratives, and complex creative projects—fundamentally reshaping governance.
introduction
THE INCENTIVE ENGINE
Introduction
On-chain royalties are not a payment feature but a programmable incentive layer for protocol governance.
This is not about JPEGs. While popularized by NFT marketplaces like Blur and OpenSea, the mechanism's power is its application to DeFi yield, DAO treasuries, and public goods funding.
Protocols like Uniswap and Aave demonstrate that fee switches are a form of royalty. The ERC-2981 standard formalizes this, turning any on-chain cash flow into a programmable revenue stream for designated recipients.
Evidence: The $3.8B in creator royalties paid on Ethereum (2021-2023) proves the model's economic viability, but its governance potential for DAOs like Arbitrum or Optimism remains under-exploited.
key-trends
GOVERNANCE PRIMITIVE
Executive Summary
On-chain royalties are not just a payment mechanism; they are a programmable, verifiable primitive for aligning creator and collector incentives at the protocol level.
01
The Problem: The Royalty Wars
Marketplaces like Blur and OpenSea have turned creator royalties into an optional feature, creating a race to the bottom and a $500M+ annual revenue shortfall for creators. This is a failure of application-layer governance.
- Marketplace Dominance: Top platforms dictate terms, fragmenting enforcement.
- Collector Misalignment: Traders are incentivized to bypass fees, harming the ecosystem they profit from.
- Broken Social Contract: The original NFT value proposition of perpetual creator support is broken.
$500M+
Annual Shortfall
0-0.5%
Effective Rate
02
The Solution: Protocol-Level Enforcement
Embedding royalty logic into the NFT smart contract itself, as pioneered by Manifold's Royalty Registry and ERC-2981, shifts governance from marketplaces to the asset. This makes fees unstoppable and verifiable.
- Creator Sovereignty: The fee schedule is a immutable property of the token, like its metadata.
- Universal Compliance: Any marketplace or wallet interacting with the asset must respect its rules.
- Reduced Friction: Eliminates the need for centralized blacklists or moral persuasion.
100%
Enforcement Rate
ERC-2981
Standard
03
The Primitive: Programmable Value Flows
On-chain royalties transform a static fee into a dynamic governance primitive. This enables complex, automated incentive structures previously impossible at the application layer.
- Tiered & Dynamic Fees: Fees can adjust based on holder duration, volume, or DAO votes.
- Direct Treasury Funding: Royalties can auto-fund a project's DAO treasury or community vault.
- Composable Incentives: Royalty streams can be used as collateral, fractionalized, or integrated into DeFi protocols like Aave or Compound.
Dynamic
Fee Logic
DeFi x NFTs
Composability
04
The Proof: Manifold & EIP-7504
Real-world adoption proves the model. Manifold's registry serves as a canonical on-chain reference for over 1M NFTs. The emerging EIP-7504 (Royalty Multi-Registry) standard aims to create a competitive market for registry services, further decentralizing control.
- Network Effects: A single source of truth reduces gas costs and complexity for integrators.
- Regulatory Clarity: On-chain, transparent payment flows provide a clearer framework for legal compliance.
- Developer Adoption: Major platforms are increasingly building support, making bypassing the standard commercially untenable.
1M+
NFTs Served
EIP-7504
Next Gen
thesis-statement
THE GOVERNANCE PRIMITIVE
The Core Thesis: From Payment to Protocol
On-chain royalties are evolving from a simple payment mechanism into a programmable governance primitive that aligns creator and collector incentives.
Royalties are a coordination primitive. They are not just a fee; they are a programmable, on-chain agreement that creates a direct economic feedback loop between creators and their ecosystem.
Protocols monetize governance, not just art. Unlike simple payments, royalties in systems like Manifold's Royalty Registry or Zora's 721A are upgradeable contracts. This transforms a static fee into a dynamic policy layer for community funding and curation.
The market enforces what the code cannot. The failure of OpenSea's optional enforcement proved that off-chain social consensus is fragile. On-chain primitives like EIP-2981 and ERC-7641 provide the technical substrate for durable, programmable economic relationships.
Evidence: Platforms with enforceable creator economics, like Zora and Foundation, see higher secondary sales volume per collection than those without, demonstrating that aligned incentives drive sustainable network activity.
A GOVERNANCE PRIMITIVE
The State of Play: Royalty Enforcement Models
Comparison of core technical mechanisms for enforcing creator royalties on-chain, moving beyond marketplace policy.
| Enforcement Mechanism | Marketplace Policy (e.g., OpenSea) | Transfer Hook (e.g., Manifold, ERC-721C) | Soulbound / Non-Transferable (e.g., ERC-5192) | Fully On-Chain Logic (e.g., Art Blocks) |
|---|---|---|---|---|
Core Enforcement Layer | Off-Chain Policy / List | Smart Contract (Pre/Post-Transfer) | Smart Contract (Transfer Restriction) | Smart Contract (Mint/Render Logic) |
Royalty Bypass Vulnerability | ||||
Requires Marketplace Cooperation | ||||
Gas Overhead per Transfer | 0% | ~20k-50k gas | ~25k gas (revert) | 0% (enforced at source) |
Secondary Market Flexibility | High | High (if hook respected) | None (Non-Transferable) | Configurable |
Creator Sovereignty Level | Low (Policy can change) | High (Code is law) | Absolute | Absolute |
Example Implementations | OpenSea, Blur | Manifold Royalty Registry, Limit Break's ERC-721C | ERC-5192 Minimal Soulbound | Art Blocks Engine, deterministic generative art |
deep-dive
THE MECHANISM
The Governance Primitive in Action
On-chain royalties are a governance primitive that directly encodes creator incentives into the asset's transfer logic.
Royalties are a protocol parameter. They are not a social norm but a programmable rule enforced at the smart contract level, akin to a tax function in a DeFi protocol like Uniswap.
This creates a direct stakeholder. The creator becomes a perpetual, passive participant in the secondary market, aligning their incentives with the protocol's long-term health and liquidity.
ERC-721C is the standard. This standard, championed by Limit Break, enables configurable royalty enforcement logic, shifting control from marketplaces like Blur and OpenSea back to the token contract itself.
Evidence: After ERC-721C adoption, creator earnings on compliant collections became immune to marketplace policy changes, demonstrating fee enforcement as a sovereign contract function.
case-study
GOVERNANCE PRIMITIVES
Case Studies: Beyond the 1-of-1 NFT
On-chain royalties are evolving from a simple fee mechanism into a programmable primitive for creator-led governance and ecosystem alignment.
01
The Problem: Royalty Unenforcement
Optional royalties on marketplaces like Blur and OpenSea led to a >90% drop in creator earnings on secondary sales. This broke the core economic promise of NFTs, turning them into purely speculative assets.
- Broken Incentives: Creators bear the cost of building a brand while traders capture all value.
- Protocol Fragility: Without sustainable funding, long-term project development and community support become impossible.
>90%
Revenue Drop
0%
Enforcement
02
The Solution: Programmable Royalty Standards
New standards like EIP-2981 and ERC-721-C enable on-chain, unbreakable royalty logic. This transforms a fee into a governance lever.
- Creator Sovereignty: Logic is embedded in the token contract, making bypassing it equivalent to breaking the asset.
- Dynamic Rules: Royalties can be programmed to fund DAO treasuries, adjust based on holder status, or sunset after a period.
100%
On-Chain
ERC-721-C
New Standard
03
Art Blocks: Curated Finance
Art Blocks uses on-chain royalties to fund its Curated and Artist Playground programs, creating a self-sustaining artistic ecosystem.
- Ecosystem Flywheel: Secondary sales revenue directly funds grants for new artist cohorts.
- Stakeholder Alignment: Collectors are directly investing in the platform's future artistic pipeline with every trade.
$1B+
All-Time Volume
DAO-Funded
Grants
04
The Problem: Static Treasury Management
Project DAOs with large NFT-based treasuries (e.g., from mint proceeds) face the idle asset problem. Holding ETH or stablecoins generates no yield and doesn't align with the community's values.
- Capital Inefficiency: Millions in treasury assets sit dormant.
- Misaligned Exposure: Holding generic blue-chips doesn't reinforce the project's own ecosystem.
Idle
Capital
Zero Yield
Treasury
05
The Solution: Royalties as DeFi Collateral
Protocols like NFTfi and BendDAO allow creators to use future royalty streams as collateral for loans. This unlocks working capital without selling equity or dumping tokens.
- Future Cash Flow Monetization: Turn predictable, on-chain revenue into upfront capital for expansion.
- Non-Dilutive Funding: Builders retain full ownership and control while accessing liquidity.
NFTfi
Protocol
Non-Dilutive
Funding
06
Yuga Labs: The Ecosystem Tax
Yuga enforces royalties across its BAYC/MAYC/Otherside ecosystem, funneling millions into its treasury. This revenue funds ApeCoin DAO grants, game development, and metaverse infrastructure.
- Sovereign Funding: Creates a war chest independent of venture capital or token inflation.
- Protocol-Led Growth: Treasury directly invests in the utilities and experiences that increase the core assets' value.
Millions
Treasury Inflow
ApeCoin DAO
Funded By Fees
counter-argument
THE GOVERNANCE DILEMMA
Counter-Argument: The Opt-Out Problem
The ability for marketplaces to bypass royalties is not a bug but a feature that reveals the true governance primitive of on-chain royalties.
On-chain royalties are opt-in governance. The EIP-2981 standard is a proposal, not a mandate. Marketplaces like Blur and OpenSea choose to honor it based on creator and collector consensus. This makes royalty enforcement a social and economic coordination problem, not a technical one.
The opt-out mechanism is a pressure valve. It prevents a hard fork scenario where a dominant marketplace's policy becomes de facto law. This forces creators to build communities that value their work, moving beyond simple rent extraction.
Compare this to protocol governance. A DAO's treasury rules are not enforced by the EVM but by social consensus and tooling like Snapshot and Tally. On-chain royalties function identically, requiring off-chain coordination for on-chain outcomes.
Evidence: The Manifold Studio royalty registry shows creators actively registering and updating their enforcement preferences. This creates a transparent, on-chain record of intent that marketplaces and aggregators must acknowledge to maintain legitimacy.
takeaways
GOVERNANCE PRIMITIVE
Key Takeaways for Builders
On-chain royalties are not just a payment mechanism; they are a programmable coordination layer for aligning creators, collectors, and protocols.
01
The Problem: Royalties as a Tax
Treating royalties as a simple transfer tax creates adversarial dynamics, leading to widespread enforcement failure and market fragmentation (e.g., Blur vs. OpenSea).
- Enforcement Failure: Optional royalties on major marketplaces like Blur led to >50% drop in creator earnings.
- Protocol Friction: Marketplaces compete on bypassing fees, not building value.
- Misaligned Incentives: Collectors see fees as a cost, not an investment in the ecosystem.
>50%
Earnings Drop
High
Fragmentation
02
The Solution: Royalties as Stake
Programmable, on-chain royalties transform fees into a governance primitive, aligning long-term incentives across the value chain.
- Creator-Collector Alignment: Royalty streams can be staked for voting power or protocol rewards, as seen in experiments with Manifold and Zora.
- Protocol-Led Curation: Marketplaces like OpenSea can use verified royalty compliance as a quality signal and differentiator.
- Composable Cash Flows: Royalty streams become a primitive for DeFi (collateral, bonding curves) and DAO treasury management.
Programmable
Alignment
DeFi Native
Composability
03
The Blueprint: EIP-2981 & Beyond
Technical standards like EIP-2981 provide the foundation, but the real innovation is in the application layer logic built on top.
- Standardized Hook: EIP-2981 defines a universal
royaltyInfofunction, enabling cross-marketplace compatibility. - Modular Enforcement: Protocols like 0xSplits and Royalty Registry allow for complex, upgradeable payout logic and on-chain verification.
- Future-Proofing: Enables novel models like decaying royalties, performance-based fees, and direct integration with L2s like Base and Arbitrum for cost efficiency.
Universal
Standard
Modular
Enforcement
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