Why NFT Royalty Enforcement Requires a Legal, Not Technical, Solution

Royalty enforcement is a legal problem. Smart contracts cannot prevent a user from selling an asset on a secondary market that ignores the creator's fee, like Blur or Sudoswap. The technical layer only facilitates transfers; it cannot mandate economic terms.

Marketplaces are the choke point. Protocols like EIP-2981 standardize royalty information, but enforcement depends on marketplace compliance. This creates a prisoner's dilemma where platforms compete by removing fees to attract volume, as seen in the Blur vs. OpenSea wars.

On-chain enforcement breaks composability. Aggressive methods, like transfer hooks that block sales, fragment liquidity and are antithetical to permissionless systems. They treat symptoms and create worse network effects.

Evidence: Royalty payments on major collections plummeted over 80% after the rise of optional-royalty marketplaces, demonstrating that code is not law for social and economic agreements.

Royalty enforcement is a legal problem. Smart contracts can only govern on-chain state, not the economic incentives of off-chain marketplaces like Blur or OpenSea. These platforms route around technical blocks by using private mempools or alternative transfer methods.

The market chooses efficiency. Projects like Manifold's Royalty Registry attempted technical solutions, but traders migrated to platforms with optional royalties. This created a classic prisoner's dilemma where collective action fails without a binding, off-chain framework.

Code cannot mandate value flow. An NFT transfer is permissionless, but the attached payment is not. This is the same intent-based architecture that powers UniswapX and CowSwap—separating execution from settlement. The payment is a separate, optional transaction.

Evidence: After OpenSea made royalties optional on most chains, creator earnings plummeted by over 90% on secondary sales, proving that marketplace policy, not code, dictates value distribution.

Code lacks jurisdiction. Smart contracts operate within a single blockchain's state machine. They cannot read or write to off-chain systems like centralized marketplaces (e.g., OpenSea, Blur) or compel real-world actors. A royalty enforcement mechanism on Ethereum is powerless against a sale on a private database.

Legal contracts create off-chain liability. A binding agreement between creator and platform establishes a duty to pay. Breach of this duty triggers legal recourse, not a failed transaction. This is the model adopted by platforms like Magic Eden for their optional royalty program.

The EIP-2981 standard is a request, not enforcement. This technical standard signals a royalty amount but relies entirely on marketplace compliance. Its failure is evidenced by the near-zero royalty enforcement on major marketplaces post the Blur wars.

Evidence: Creator earnings from on-chain royalties plummeted over 90% in 2023 as marketplaces like Blur made them optional, proving that without legal compulsion, code-based solutions are ignored.

On-chain enforcement is coherent: The pro-code argument is logically sound. Protocols like EIP-2981 and Manifold's Royalty Registry create a technical standard for routing secondary sales fees directly to creators. This prevents marketplaces like Blur or OpenSea from bypassing payments by design, making royalties a protocol-level feature.

The flaw is economic sovereignty: The argument fails because it ignores user choice. A competing marketplace can simply fork the NFT contract, strip the enforcement, and offer traders a discount. This creates a classic race to the bottom, where liquidity migrates to the venue with the lowest fees, as seen with Blur's rise.

Code cannot bind behavior: Technical enforcement attempts to solve a social coordination problem with cryptography. It assumes all market participants will opt into the royalty-enforcing system, but rational economic actors will defect to save money. This makes the 'enforced' standard a voluntary club, not a law.

Evidence from market dominance: Look at Blur's market share. It captured dominant volume by making royalties optional, proving that traders prioritize execution cost over creator compensation when given the choice. No technical mechanism survives a fork that removes it.