On-Chain Royalty

The most direct implementation where the royalty logic is embedded in the NFT's smart contract itself. The contract can restrict transfers to only marketplaces that respect its fee structure or include logic that sends a percentage of any sale to a designated wallet. This method puts control in the hands of the creator but requires marketplace cooperation to be effective. Examples include early implementations like Art Blocks and custom contracts used by major collections.

A standardized, contract-level allow/deny list system for marketplaces. Pioneered by OpenSea with its Operator Filter Registry, it allows an NFT contract to block sales on marketplaces that do not enforce creator fees. This creates a powerful economic incentive for marketplaces to comply. However, it can be circumvented if a marketplace operates in a non-standard way or if the NFT collection owner removes the filter.

Protocols that specialize in tracking secondary sales and enforcing royalties across all marketplaces, acting as a backstop. Manifold's Royalty Registry is a canonical example, providing a single source of truth for royalty information that marketplaces can query. Other services use on-chain arbitrage or social enforcement mechanisms to ensure creators are paid, even on non-compliant platforms.

A shift towards flexible or optional royalty models driven by market competition. Platforms like Blur and Sudoswap popularized this, making royalties optional or setting them to very low percentages (e.g., 0.5%). This places the onus on collectors to pay, often incentivized by token rewards or platform loyalty points, fundamentally changing the economic assumptions for creators.

An Ethereum Improvement Proposal (EIP) that defines a standardized, lightweight interface for smart contracts to signal royalty information. ERC-2981 provides a royaltyInfo function that any marketplace can call to discover the recipient and amount due for a given sale. While it doesn't enforce payment, it establishes a universal technical standard for declaring royalties, improving interoperability.

A novel implementation where royalties are automatically enforced within specific financial primitives. In platforms like Foundation's Zora NFT Marketplace, mechanisms such as Dutch auctions or split contracts have royalty logic baked directly into the sale mechanic. This ensures the creator's share is an inseparable part of the transaction logic on that platform, rather than a post-hoc policy.

EIP-2981 is the primary Ethereum standard for on-chain royalties, defining a simple interface (royaltyInfo) that returns the recipient address and royalty amount for a given sale price. This allows marketplaces to query and honor royalties programmatically. Key points:

• Standardization: Provides a universal method for contracts to declare royalties.
• Flexibility: Supports both fixed percentage and complex, custom logic.
• Adoption: Widely implemented by major NFT collections and marketplaces.

Beyond simple declaration, advanced enforcement mechanisms exist to make royalty payments mandatory. These include:

• Transfer Restrictions: Smart contracts that block transfers unless the royalty fee is paid (e.g., via a require statement).
• Royalty Enforcement Modules: Separate contracts that act as intermediaries for all trades, taking a fee before forwarding proceeds.
• Soulbound / Non-Transferable Traits: Making certain NFT attributes non-transferable unless a fee is settled, creating economic pressure to comply.

Royalty enforcement depends on marketplace integration. Compliant marketplaces (e.g., OpenSea, Blur in 'royalty-enforced' mode) read the on-chain royalty data and deduct the fee before paying the seller. Non-compliant or optional-royalty marketplaces ignore these signals, creating a fragmentation where enforcement is not technical but social, relying on community norms and blocklist threats.

On-chain royalties create a fundamental tension between creator rights (to ongoing revenue) and collector rights (to freely transfer property). This debate centers on whether royalties are a social contract or an enforceable property right. Technical enforcement can conflict with the principle of true ownership, where an asset's holder has full control over its disposition.

Pure on-chain enforcement faces technical limitations:

• Private Sales / OTC: Direct wallet-to-wallet transfers can bypass marketplace logic.
• Wrapper Contracts: NFTs can be locked in a new contract that severs the link to the original royalty logic.
• Layer 2 & Cross-Chain: Royalty information must be correctly bridged and interpreted across different execution environments. These gaps often lead to hybrid models combining on-chain signals with off-chain legal agreements.

The technical implementation of royalties varies by platform and standard. Key methods include:

• Transfer Hooks: Smart contracts that execute royalty logic on transfer, often using the IERC2981 standard.
• Marketplace Allowlists: Contracts that restrict trading to marketplaces that honor the creator's fee settings.
• Owner-Enforced Fees: Royalties are enforced at the contract level, requiring buyers to pay the fee directly to the contract. The effectiveness of these mechanisms depends on widespread marketplace compliance and the underlying blockchain's capabilities.

A major challenge emerged as leading marketplaces like Blur and OpenSea made royalty payments optional to attract traders with lower fees. This created a race to the bottom, where market share was gained by offering the lowest possible transaction costs, often at the expense of creator revenue. This shift forced a reevaluation of how royalties are technically and socially enforced.

The ecosystem has responded with new strategies to uphold creator revenue:

• Loyalty-Premium NFTs: Projects like Art Blocks restrict secondary sales to marketplaces that enforce royalties.
• Blocklist Tools: Services allow creators to block their NFTs from trading on non-compliant platforms.
• Collector-Led Enforcement: Some collector communities self-enforce royalty payments, viewing them as essential for ecosystem health. These actions highlight the social and economic contract beyond mere code.

In response to enforcement challenges, projects are exploring models that do not rely on secondary sale fees:

• Upfront Mint Revenue: Focusing on primary sales and building sustainable treasury models.
• Access & Utility Gating: Royalties are replaced by recurring revenue from access to services, events, or physical goods tied to the NFT.
• Protocol-Level Solutions: New standards and Layer 2 solutions aim to bake royalty enforcement into the protocol layer, making it unavoidable.

The optional nature of on-chain royalties raises legal questions. While smart contract code is not inherently legally binding, creators may have recourse through:

• Terms & Conditions: Legal agreements attached to the NFT that stipulate royalty obligations.
• Intellectual Property Law: Potential claims based on copyright or licensing breaches if secondary sales violate stated terms. The intersection of code and law in enforcing digital ownership rights remains an evolving frontier.

The royalty debate is fundamentally about aligning incentives. Proponents argue enforced royalties are critical for sustainable creator economies, funding ongoing development and community building. Critics contend that mandatory fees reduce market liquidity and efficiency. The long-term health of the NFT ecosystem may depend on finding a balance that adequately rewards creation while maintaining an open and competitive marketplace.