Secondary Sale Royalties

Royalties are enforced at the smart contract level, automatically deducting a percentage of the sale price and routing it to the creator's wallet. This eliminates manual collection and relies on the immutable logic of the contract rather than platform policy.

• On-chain vs. Off-chain: True enforcement requires the sale logic to be executed on-chain (e.g., via a marketplace's smart contract).
• Trustless Execution: Once coded, the payment is guaranteed if the sale occurs through a compliant mechanism.

Royalties are typically configured as a fixed percentage of the secondary sale price, though more complex models exist. Key configuration parameters include:

• Percentage Rate: Commonly ranges from 2.5% to 10%, set by the creator at minting.
• Recipient Address: The wallet (or splitter contract) that receives payments.
• Immutable vs. Updatable: Some contracts allow creators to update fees, while others lock them permanently.

Royalty enforcement is not inherent to the asset itself but depends on the marketplace's willingness to integrate the royalty standard. This creates a central point of failure.

• Optional Royalties: Some marketplaces make royalty payments optional for buyers, breaking automatic enforcement.
• Royalty Enforcement Tools: Projects use techniques like transfer restrictions, allowlists, and on-chain metadata to discourage trading on non-compliant platforms.

Royalty revenue can be programmatically split among multiple parties, enabling complex revenue-sharing agreements directly on-chain.

• Split Contracts: Smart contracts like 0xSplits or PaymentSplitter can automatically distribute funds to a predefined list of addresses (e.g., artist, collaborator, DAO treasury).
• Immediate Settlement: Funds are transferred atomically with the sale, providing real-time revenue without intermediaries.

In response to enforcement challenges, the ecosystem is evolving beyond simple percentage fees.

• Creator Fees / Protocol Fees: Treating royalties as a network-level protocol fee baked into the NFT collection's core contract.
• Annotated Transfer Methods: Using custom transfer functions that require fee payment.
• Loyalty Programs: Rewarding buyers who pay royalties with future benefits or token airdrops.

Royalties are encoded directly into the smart contract, typically using the ERC-2981 standard. This allows marketplaces to programmatically query and pay the royalty to the creator's address on every sale.

• How it works: The contract's royaltyInfo function returns the recipient address and fee amount.
• Limitation: Relies on marketplace compliance; a non-compliant platform can bypass the fee.

The most common model where royalties are a policy enforced by the marketplace, not the blockchain. The platform's order book or matching engine applies the fee at the point of sale.

• Examples: OpenSea, Blur, and Magic Eden historically used this model.
• Key Issue: Creates a race to the bottom, as marketplaces can compete by offering lower or optional royalties to attract traders.

Royalties provide a continuous revenue stream, aligning long-term incentives between creators and collectors.

• Primary vs. Secondary: Creators earn 100% of the initial (primary) sale, plus a percentage (e.g., 5-10%) of all future secondary sales.
• Impact: Funds ongoing project development, community rewards, and artistic careers, moving beyond a one-time mint revenue model.

A major ecosystem conflict emerged as marketplaces began making royalties optional to gain trader market share, breaking the original social contract.

• Trigger: The rise of Blur and its incentivized trading model forced other platforms to adopt optional royalties.
• Result: Widespread reduction in reliable creator payouts, leading to the development of new technical enforcement solutions.

New standards and mechanisms designed to enforce royalties at the protocol level, reducing reliance on marketplace goodwill.

• ERC-721C: Allows creators to define approved marketplaces and enforce fees via a transfer security policy.
• Blocklist Functions: Smart contracts can restrict transfers to or from non-compliant marketplaces.
• SudoSwap's Approach: Uses a bonding curve AMM where royalties are baked into the pool's pricing math.

Key technical specifications and ecosystem components that interact with royalty systems.

• ERC-2981: The NFT Royalty Standard for on-chain royalty information.
• Operator Filter Registries: A system (like OpenSea's) that allows creators to restrict sales to marketplaces that enforce fees.
• Royalty Splitting: Smart contracts that automatically distribute royalties to multiple addresses (e.g., co-creators, DAO treasury).

The fundamental challenge is that blockchains like Ethereum do not natively support automatic royalty payments on secondary sales. Enforcement relies on off-chain agreements and marketplace compliance. Key technical hurdles include:

• Smart contract bypass: Traders can use custom contracts or direct peer-to-peer transfers to circumvent royalty logic.
• Forked marketplaces: Competing marketplaces can choose to ignore royalty standards to attract volume.
• Standard fragmentation: Multiple competing standards (e.g., EIP-2981, Manifold) create implementation inconsistency.

Royalty enforcement has historically depended on the voluntary policy of centralized marketplaces (e.g., OpenSea, Blur). This creates single points of failure and policy risk. If a major marketplace reduces or removes royalty enforcement to compete on fees, creator revenue can collapse overnight. This dynamic shifts power from creators and protocol designers to platform operators, undermining the decentralized ethos of Web3.

Many marketplaces now make royalties optional for buyers, presenting them with a choice to pay. This turns a technical enforcement problem into a social and economic one. Buyers are economically incentivized to opt-out, placing the burden on community norms and creator prestige to uphold payments. This model tests the strength of the creator-collector relationship and often results in significantly reduced effective royalty rates.

Solutions that enforce royalties directly in the NFT's smart contract (e.g., transfer hooks, soulbound traits) introduce new trade-offs:

• Reduced liquidity: Restrictive contracts can make NFTs less fungible and harder to trade on all marketplaces.
• Gas cost increase: Additional logic executed on every transfer increases transaction fees for users.
• Complexity and security: More complex contract logic increases the attack surface and risk of bugs, potentially locking assets.

The legal standing of blockchain-enforced royalties is untested in most jurisdictions. Questions remain:

• Are royalty fees a legally binding contract or an unenforceable hope?
• How do they interact with first-sale doctrine or consumer protection laws?
• What jurisdiction governs a fully on-chain, decentralized enforcement mechanism? This ambiguity creates risk for projects that rely on royalties for long-term sustainability.

The ecosystem is actively developing new models. These include:

• EIP-2981: A standardized royalty info interface for smart contracts.
• Creator-owned marketplaces: Where royalties are enforced by social contract within a dedicated ecosystem.
• Protocol-level fees: Shifting revenue from secondary sales to primary mint fees or protocol-level mechanisms.
• Dynamic enforcement: Using on-chain data to reward royalty-paying collectors with future benefits (e.g., airdrops, access).