Royalty Bypass

The primary method of royalty collection is off-chain enforcement by marketplaces. Platforms like OpenSea historically honored creator royalties by baking the fee logic into their smart contracts and order books. This creates a centralized point of failure, as competing marketplaces can gain market share by simply not implementing this logic, leading to a race to the bottom on fees.

Traders use specific technical workarounds to avoid royalties:

• Direct Peer-to-Peer Transfers: Using the NFT contract's simple transferFrom function instead of a marketplace's sale contract.
• Wrapper Contracts: Locking an NFT into a new contract (e.g., Sudoswap's AMM pools, Blur's bidding pools) where the sale occurs via the wrapper, not the original NFT.
• Alternative Marketplaces: Selling on platforms that do not enforce royalties or allow optional tipping.

A technical standard designed to combat bypass. ERC-2981 is a standardized interface that returns royalty payment information directly from the NFT smart contract itself. This allows any marketplace or protocol to programmatically discover and pay royalties, moving enforcement from trust in marketplaces to verifiable code. However, adoption requires NFT creators to deploy compliant contracts.

Creators and projects have deployed various strategies to protect revenue:

• Blocklisting: Restricting trading on known royalty-avoiding marketplaces by detecting their proxy contracts.
• Transfer Restrictions: Implementing allowlists or token-gating to only permit transfers to/from approved addresses (e.g., specific marketplaces).
• Hooks & Callbacks: Using smart contract hooks (like EIP-3009) to execute logic on transfer, forcing a fee payment.

Royalty bypass has significant economic consequences:

• Reduced Creator Revenue: Undermines the primary sustainable income model for many NFT artists and projects.
• Liquidity Fragmentation: Liquidity spreads across marketplaces with different fee policies.
• Protocol Wars: Competition between marketplaces (e.g., Blur vs. OpenSea) often centers on royalty policies, influencing trader behavior and token incentives.

A market-driven compromise where the buyer or seller can choose to pay the creator royalty. This shifts the enforcement from code to social pressure or platform incentives (e.g., better visibility for listings that pay royalties). It represents a move from mandatory fees to a tipping model, fundamentally changing the creator-collector economic relationship.

Some marketplaces implement policies that make royalty payments optional for buyers or sellers, effectively bypassing the on-chain enforcement mechanism. This is a policy decision, not a technical exploit.

• Key Example: Blur's initial model made royalties optional, creating a competitive pressure on other platforms.
• Mechanism: The marketplace's smart contract simply does not check or forward the royalty payment to the creator's address during the settlement logic.

Traders use simple token transfers or OTC (Over-The-Counter) deals to move NFTs without triggering a sale on a royalty-enforcing marketplace.

• Process: The NFT is sent directly from seller to buyer's wallet address using a standard transfer or safeTransferFrom function.
• Limitation: This method requires trust between parties and lacks the liquidity, discovery, and escrow services of a marketplace.

A smart contract (wrapper) holds the NFT, and ownership is represented by trading the wrapper's tokens (e.g., ERC-20 or ERC-1155), bypassing the NFT's native royalty mechanism.

• How it works: 1. User deposits NFT into wrapper contract. 2. Contract mints a representative token. 3. The representative token is traded on a marketplace without royalties. 4. Holder can redeem the token for the original NFT.
• Example: The Sudoswap AMM model used NFT-backed pool tokens that could be traded royalty-free.

Sophisticated traders use flash loans to execute atomic, multi-step transactions that purchase and resell an NFT within a single block, capturing the spread while avoiding royalties.

• Typical Flow: 1. Borrow assets via flash loan. 2. Buy NFT on Marketplace A (pay royalty). 3. Sell NFT on Marketplace B (no/low royalty). 4. Repay flash loan. The profit is the price difference minus gas and any unavoidable fees.
• Requirement: This relies on price discrepancies between marketplaces with different royalty policies.

Early versions of royalty enforcement relied on marketplace allowlists. New marketplaces could simply not be on the list, or traders could use custom, non-listed sale contracts.

• EIP-2981 Context: This royalty standard allows an NFT's smart contract to specify a receiver and fee, but it's up to the marketplace to read and respect it. Nothing forces compliance.
• Bypass: A marketplace or private sale contract can ignore the EIP-2981 royaltyInfo call entirely.

Parties use a trusted third-party escrow service or a simple, custom escrow smart contract to facilitate a sale off the public order books of major marketplaces.

• Process: Seller locks NFT in escrow. Buyer sends payment to escrow. Upon confirmation, escrow releases NFT to buyer and payment to seller.
• Characteristic: This method replicates marketplace security for OTC deals but operates outside any platform's royalty logic.

Royalty enforcement is not native to the core Ethereum or Solana protocols; it's a feature implemented at the marketplace or smart contract level. Bypasses occur when a marketplace's trading logic does not check or honor the royalty parameters set in an NFT's metadata or associated royalty registry. Key mechanisms include:

• Direct peer-to-peer transfers using simple transfer functions.
• Alternative sale contracts that don't invoke standard royalty payment hooks.
• Aggregators that route trades through the lowest-fee venues, often those with optional royalties.

The lack of a universal, protocol-level standard has fragmented enforcement. Competing proposals create loopholes:

• EIP-2981: A widely adopted Ethereum standard for on-chain royalty info, but it's non-enforceable; marketplaces must voluntarily comply.
• Creator-Enforced Royalties: Solana's Metaplex Core and Ethereum's Manifold Royalty Registry attempt stronger enforcement by restricting transfers unless fees are paid, but these can be circumvented.
• Operator Filter Registries: Allow creators to blacklist non-compliant marketplaces, though this approach faces scalability and decentralization criticisms.

Blur became the central case study in royalty bypass by initially making royalties optional to capture market share from OpenSea. Its model highlights the tension:

• Aggregator Advantage: Blur's platform aggregates liquidity from multiple sources, including marketplaces with low or zero fees.
• Bid Pool Mechanics: Its peer-to-peer bidding system often circumvents standard sale contracts.
• Market Pressure: This forced OpenSea to temporarily make some royalties optional, demonstrating how one major player can reshape ecosystem norms.

Sophisticated users and tools can bypass royalties through direct blockchain interactions:

• Direct transferFrom Calls: Using the NFT contract's basic transfer function instead of a marketplace's sale function.
• Flash Loan Arbitrage: Buying and instantly reselling an NFT in a single transaction via a custom contract, skipping royalty hooks.
• Private Sales: Using OTC (Over-The-Counter) desks or NFTescrow services that settle off the public order books.
• Wrapper Contracts: Locking the NFT into a derivative token (like ERC-1155 or ERC-6960) that is then traded without triggering the underlying asset's royalties.

Projects are exploring more robust technical and economic models to align incentives:

• On-Chain Enforcement: Protocols like Art Blocks and certain Sudoswap AMM pools bake royalties directly into the transfer logic of their custom contracts.
• Transfer Hooks: Solana programs and newer Ethereum standards like ERC-7512 enable contracts to execute code on every transfer, potentially enforcing fees.
• Alternative Monetization: Shifting from secondary royalties to primary sales, revenue-sharing staking models, or access-gated utilities reduces reliance on a flawed secondary fee mechanism.

The bypass debate is fundamentally about value distribution and governance in decentralized ecosystems:

• Creator vs. Collector Rights: Tension between a creator's right to perpetual revenue and a collector's right to freely trade purchased assets.
• Liquidity vs. Sustainability: Marketplaces face a trade-off between attracting liquidity (with low fees) and supporting the creator economy.
• DAO Governance: Many NFT projects are DAOs that use treasury funds from royalties. Bypass directly impacts their operational budgets and roadmap execution, forcing a re-evaluation of funding models.

A royalty bypass is the execution of a transaction that transfers a Non-Fungible Token (NFT) without triggering the royalty payment logic encoded in its smart contract. This is achieved by interacting with the contract through alternative entry points or marketplaces that do not enforce the royaltyInfo function call.

• Core Mechanism: Exploits the optional nature of the EIP-2981 royalty standard, which suggests but does not mandate fee enforcement.
• Common Vectors: Includes direct peer-to-peer transfers, use of aggregation protocols, or trading on marketplaces that intentionally disable royalty enforcement.

Several methods enable the circumvention of on-chain royalties, each exploiting different aspects of contract interaction and marketplace design.

• Direct Contract Calls: Using transferFrom or safeTransferFrom functions directly, bypassing marketplace settlement layers that would normally calculate fees.
• Aggregator & Blur-style Bidding: Platforms that aggregate listings from multiple sources often settle trades in a single transaction that does not invoke royalty logic.
• Marketplace Policy: Some marketplaces make royalty payments optional for traders or do not implement the royalty standard at all.
• Wrapper Contracts: Locking an NFT into a derivative contract (like a fractionalizer) and trading the derivative token instead.

Widespread royalty bypass directly reduces the sustainable revenue for artists and project developers, undermining a core value proposition of NFTs.

• Revenue Erosion: Creators lose the recurring income stream from secondary sales, which is often critical for funding ongoing development and community projects.
• Market Distortion: Creates a two-tiered market where NFTs traded on royalty-enforcing platforms are less liquid or valuable than those on bypass-friendly platforms.
• Incentive Misalignment: Reduces the financial incentive for creators to provide long-term utility, support, and ecosystem development for their collections.

Developers have proposed and implemented stronger smart contract designs to make royalties more resistant to bypass.

• Transfer Restrictions: Contracts that restrict the transfer function to only allow calls from approved, royalty-enforcing marketplaces (e.g., using an allowlist).
• Hooks & Callbacks: Implementing functions like onTransfer that must execute royalty logic for any transfer to be valid.
• Owner-Enforced Fees: Making the creator/DAO the explicit fee recipient for all trades within the contract logic itself, rather than relying on external marketplaces.
• EIP-721C: A proposed standard for configurable, on-chain enforcement of royalty payments.

Trading platforms play a crucial role in the royalty ecosystem through policy, technology, and ecosystem pressure.

• Strict Policy Enforcement: Marketplaces like OpenSea have implemented tools like the Operator Filter Registry to block sales from non-compliant marketplaces.
• Optional vs. Mandatory: The debate between offering trader choice (optional royalties) versus enforcing creator intent (mandatory royalties).
• Blocklist Enforcement: Preventing NFTs listed on bypass-friendly platforms from being listed on enforcing platforms, creating economic pressure for compliance.

Understanding royalty bypass requires familiarity with adjacent standards and economic models.

• EIP-2981: The primary NFT Royalty Standard that defines a royaltyInfo function but lacks enforcement mechanisms.
• Creator Earnings: The broader economic model of ongoing revenue from secondary sales.
• Protocol-Level Fees: An alternative model where the blockchain or a base-layer protocol (like a Layer 2) mandates a fee on all transactions.
• Soulbound Tokens (SBTs): Non-transferable tokens that, by design, eliminate the secondary market and thus the royalty question.