Off-Chain Royalties

Off-chain royalties are a system for collecting and distributing creator fees on secondary NFT sales where the enforcement logic exists outside the blockchain's smart contracts. Unlike on-chain royalties encoded directly into an NFT's transfer function, off-chain models depend on external actors—primarily marketplaces—to voluntarily honor and execute royalty payments. This approach emerged as a pragmatic response to technical limitations and competitive pressures, but it introduces significant reliance on centralized intermediaries and their policies, which can change at any time.

The typical implementation involves a marketplace reading a royalty standard, like EIP-2981, from the NFT's metadata and then programmatically deducting the specified percentage from the sale price before transferring the proceeds to the seller. The marketplace's own infrastructure then routes the royalty payment to the creator's designated wallet. This creates a trust-based model; the marketplace acts as the enforcer, and if a platform chooses to bypass royalties or a sale occurs on a non-compliant marketplace or peer-to-peer, the royalty payment is easily circumvented. This fragility led to the so-called 'royalty wars' of 2022-2023.

Common tools for off-chain enforcement include allowlists and blocklists, where a creator's smart contract can identify which marketplaces are permitted to facilitate trades. Marketplaces on the allowlist agree to enforce royalties, while those on a blocklist may have their transaction functions disabled by the NFT contract. However, these lists are still maintained and updated off-chain by the project team. Other methods involve legal terms of service or the use of centralized NFT minting platforms that mandate royalty compliance for any collection launched through their service.

The primary advantages of off-chain royalties are flexibility and reduced blockchain gas fees, as the complex logic of fee distribution isn't executed on-chain for every sale. The major disadvantages are lack of guaranteed enforcement, vulnerability to marketplace policy shifts, and the fragmentation of the ecosystem as different platforms adopt different standards. This has sparked significant debate about the sustainability of creator compensation in a decentralized environment and has driven innovation in more robust, on-chain enforceable royalty models.

Off-chain royalties are a mechanism for enforcing creator compensation where the royalty logic and payment enforcement occur outside the immutable, on-chain settlement layer of a blockchain. Instead of being hardcoded into a smart contract's transfer function, the royalty terms are managed through separate, mutable systems like marketplace policies, indexer filters, or legal agreements. This approach emerged as a response to the limitations and optionality of on-chain enforcement, particularly after market shifts like the Blur marketplace's model and Ethereum's removal of royalty enforcement from its token standard. The core trade-off is between flexibility for platforms and reduced guarantee for creators, as compliance relies on the voluntary participation of intermediaries rather than cryptographic certainty.

The enforcement of off-chain royalties typically relies on a centralized allowlist or denylist maintained by marketplaces or aggregators. When a user lists or sells an NFT, the platform's backend checks the NFT's contract address or metadata against its policy database. If the collection is on the allowlist for royalties, the platform's software automatically deducts the specified percentage from the sale proceeds and routes it to the creator's wallet before completing the transaction. Major platforms like OpenSea use this method, applying fees to secondary sales only for collections that enforce royalties on-chain or for those on their curated Operator Filter list. This creates a gatekeeper model, where marketplace policies, not the blockchain protocol, ultimately determine if royalties are paid.

Technical implementations often involve indexers and metadata standards. Services like OpenSea's Seaport protocol or other marketplace APIs can read royalty information from a token's metadata—specifically the seller_fee_basis_points and fee_recipient fields in standards like ERC721. The marketplace's indexer processes this data and applies the rule within its order-matching engine. Furthermore, creator-signed listings are a cryptographic method where a sale order is only valid if signed by the original creator's wallet, allowing them to embed royalty terms directly into the signed message. However, this requires active creator participation for each listing and is not universally supported, highlighting the fragmented and non-interoperable nature of off-chain solutions across different trading venues.

The primary advantages of off-chain royalties include greater upgradability (terms can be changed without migrating contracts) and reduced gas costs for simple transfers, as no complex royalty logic runs on-chain. The main disadvantages are enforcement fragility and lack of universality. Royalties can be easily circumvented by trading on non-compliant marketplaces, via peer-to-peer transfers, or on decentralized exchanges that ignore metadata signals. This has led to a policy-driven ecosystem where creator revenue depends on the business decisions and market dominance of a few large platforms, reintroducing central points of failure and negotiation that blockchains were designed to eliminate.

The concept of on-chain royalties emerged as a core innovation of the NFT standard, embedding a creator fee—typically a percentage of secondary sales—directly into a smart contract's code. This mechanism promised a paradigm shift for digital artists, enabling them to earn ongoing revenue from their work's appreciation in value, a feature largely absent in traditional art markets. Early platforms like SuperRare and Foundation championed this model, making it a standard expectation for ERC-721 and ERC-1155 tokens. The promise was a self-executing, trustless system where compensation was guaranteed by the blockchain's immutable logic, not platform policy.

Market fragmentation and the rise of permissionless exchanges like Blur and Sudoswap precipitated a crisis for this model. These platforms allowed traders to bypass royalty enforcement by interacting directly with the underlying NFT contracts, which often only suggested a royalty payment via the EIP-2981 standard rather than mandating it. This led to a race to the bottom, where marketplaces competed on low fees by offering optional royalties, drastically reducing creator earnings. The core conflict highlighted a fundamental blockchain design tension: the immutability of assets versus the flexibility of market rules, forcing a reevaluation of how creator economics are implemented.

In response, the industry evolved towards off-chain royalty enforcement strategies. These are policy-based mechanisms where a marketplace, rather than the blockchain protocol, mandates royalty payments as a condition of using its platform. This can involve allowlists of compliant marketplaces, token-gated content or utilities for royalty-paying holders, or legal frameworks attached to the NFT's license. While effective within a platform's walled garden, this approach reintroduces centralization and fragmentation, as enforcement depends on individual corporate policy rather than a unified protocol standard, shifting power from code to platform operators.

The current landscape is a hybrid ecosystem. Many creators and projects now employ a multi-faceted approach: utilizing on-chain enforcement where possible (e.g., via creator-owned marketplaces or upgraded smart contracts with hard-coded fees), participating in off-chain allowlists for major platforms, and building utility that incentivizes royalty compliance. This evolution reflects a broader maturation of Web3, moving from idealistic protocol-level solutions to pragmatic, market-aware systems that balance decentralization with sustainable creator economics.