Secondary Sale Fees

A secondary sale fee is a smart contract-enforced rule, not a platform policy. The fee logic is embedded in the token's code (e.g., ERC-721, ERC-1155), making it self-executing and permissionless. This means:

• The fee triggers automatically upon any compliant transfer.
• It is enforced across all marketplaces that interact with the contract.
• It cannot be circumvented without modifying the contract itself.

The smart contract designates one or more fee recipients who receive the proceeds. This can be:

• A single creator's wallet address.
• A multi-signature wallet for a team or DAO.
• A splitter contract that automatically distributes funds to multiple parties (e.g., 70% to artist, 30% to platform).
• A treasury for a decentralized autonomous organization (DAO) funding community projects.

Fees are calculated based on the sale price using predefined logic. Common models include:

• Fixed Percentage: A set percentage (e.g., 5%, 10%) of the final sale price.
• Tiered Percentage: The fee changes based on sale price brackets or the number of previous sales.
• Flat Fee: A fixed amount (e.g., 0.1 ETH) is taken regardless of sale price.
• Dynamic Pricing: The fee adjusts algorithmically based on external data (like time or market volume).

Fees can be set at different granularities within the smart contract:

• Contract-Level: A single, global fee schedule applies to all tokens in the collection. This is the most common implementation.
• Token-Level: Individual tokens (NFTs) within the same collection can have unique fee rates or recipients. This allows for customized terms for rare or special edition assets.

For a fee to be collected, the marketplace's exchange logic must query and respect the on-chain fee parameters. This involves:

• The marketplace calling the token contract's royaltyInfo function (a standard like EIP-2981).
• The contract returning the recipient address and fee amount.
• The marketplace deducting that amount from the seller's proceeds and sending it to the recipient in the same transaction.

Secondary sale fees create sustainable economic models by aligning long-term incentives:

• Creator Sustainability: Provides ongoing revenue, transforming art from a one-time sale into an annuity-like income stream.
• Collector Signaling: A higher, enforceable royalty can signal stronger ongoing creator support and project legitimacy.
• Protocol Revenue: For NFT platforms or layer-1 blockchains, these fees can be a native monetization mechanism when integrated at the protocol level.

A secondary sale fee is a programmable percentage (e.g., 5-10%) encoded directly into a smart contract, typically an NFT's metadata or a marketplace's settlement logic. This fee is automatically deducted from the final sale price on a secondary market transaction and routed to a predefined wallet address, ensuring creators receive ongoing compensation without manual intervention.

• Enforcement Layer: Originally enforced at the marketplace level, but evolved to smart contract-level enforcement with standards like EIP-2981 for ERC-721 tokens.
• Trigger: Activated on any transfer-for-value after the initial mint or primary sale.

EIP-2981: NFT Royalty Standard is a critical technical specification that defines a standardized, on-chain method for smart contracts to signal royalty payment information. It allows any marketplace or protocol to query an NFT's contract to discover the fee recipient and percentage.

• Function: royaltyInfo(tokenId, salePrice) returns (receiver, royaltyAmount).
• Impact: Decouples royalty logic from marketplace policies, making fees more resilient across different platforms. It is widely adopted by major collections and infrastructure providers.

The effectiveness of secondary sale fees faces significant challenges due to marketplace non-compliance and the existence of royalty-optional marketplaces. Some platforms bypass fees to offer lower transaction costs to buyers and sellers, creating a race to the bottom.

• Technical Workarounds: Projects have implemented on-chain enforcement methods like transfer restrictions or fee-blocking in the token contract itself.
• Economic Pressure: The debate centers on the trade-off between creator revenue and market liquidity, leading to a fragmented ecosystem with varying enforcement levels.

Beyond individual artists, secondary fees are a fundamental revenue model for Decentralized Autonomous Organizations (DAOs) and ongoing project development. Fees can be directed to a DAO treasury to fund operations, grants, or community initiatives.

• Example: An NFT project may set a 5% fee where 2.5% goes to the original artist and 2.5% funds the project's community treasury.
• Sustainability: This creates a long-term, alignment-based economic model where continued community engagement and asset value growth benefit all stakeholders.

In response to enforcement issues, the ecosystem is exploring alternative structures for creator compensation.

• Protocol-Level Fees: Some blockchains or layer-2 networks implement fees at the protocol level, applicable to all transactions.
• Primary Sales Emphasis: A shift towards monetizing through initial sales, airdrops, and intellectual property licensing rather than relying on secondary royalties.
• Optional/Tiered Systems: Platforms offering configurable royalty settings, allowing collectors to choose to support creators.

A secondary sale fee (or royalty) is a percentage of the sale price automatically routed to a designated address, typically the original creator or project treasury, whenever an asset is resold. This is enforced at the smart contract level through standards like ERC-2981 for NFTs, which defines a universal royalty specification. The fee is deducted from the proceeds before the seller receives payment.

These fees create sustainable economic models by aligning long-term incentives between creators and collectors.

• Creator Sustainability: Provides ongoing revenue beyond the initial mint, funding development, community rewards, and future projects.
• Collector Alignment: Rewards early supporters who hold assets that appreciate, as creator success enhances asset value.
• Protocol Revenue: In DeFi or gaming, fees can be directed to a protocol treasury or liquidity pool to subsidize operations and rewards.

Royalty enforcement is not guaranteed by the blockchain itself but depends on marketplace compliance. Key challenges include:

• Optional Royalties: Some marketplaces make fees optional for buyers, breaking the economic model.
• Contract-Level Enforcement: Projects use methods like transfer hooks or owner-locked metadata to enforce fees, but these can limit interoperability.
• Layer-2 & Cross-Chain: Ensuring consistent fee collection across different scaling solutions and blockchains adds complexity.

Fee structures vary by project and are defined in the smart contract.

• Flat Percentage: A fixed rate (e.g., 5-10%) applied to all secondary sales. Common in NFT art projects like Art Blocks.
• Tiered or Dynamic Fees: Fees can change based on sale price, time held, or other conditions programmed into the contract.
• Split Payments: Fees can be distributed to multiple addresses, such as splitting between a creator, a collaborator, and a DAO treasury.

Secondary sale fees interact with several key Web3 concepts:

• Smart Contract Royalties: The programmable code that defines and executes the fee logic.
• Protocol Fees: Broader fees collected by a decentralized application or network (e.g., Uniswap's swap fee).
• Soulbound Tokens (SBTs): Non-transferable tokens that, by definition, have no secondary sales and thus no applicable fees.
• Royalty Standards: Specifications like ERC-2981 and EIP-5516 that aim to create a unified interface for royalty information.