Secondary Sale Royalty

Royalties are enforced at the smart contract level. The logic is embedded in the token's code (e.g., an ERC-721 or ERC-1155 contract), which automatically diverts a specified percentage of the sale proceeds to a predefined wallet address. This automation removes the need for manual collection and is a foundational shift from traditional, trust-based royalty systems.

Royalty enforcement models vary by marketplace and blockchain architecture.

• On-Chain Enforcement: The smart contract itself validates and executes the royalty payment. Transactions that bypass it are invalid. This is strongest on chains with centralized orderbook markets.
• Off-Chain Enforcement: Marketplaces voluntarily honor royalty parameters stored in metadata (like EIP-2981) when filling orders. This model is common on liquidity pool-based exchanges (e.g., NFT marketplaces on Seaport protocol), where bypass is technically possible.

EIP-2981 is a pivotal Ethereum Improvement Proposal that defines a standardized, gas-efficient interface for royalty info. A smart contract implementing royaltyInfo(tokenId, salePrice) returns the recipient address and royalty amount. This allows any marketplace to query and honor royalties consistently, promoting ecosystem-wide interoperability without requiring custom integrations for each collection.

The fee recipient is the wallet address designated to receive royalty payments. Advanced implementations allow for:

• Split Contracts: Payments are automatically divided among multiple parties (e.g., creator, co-creator, DAO treasury) using smart contracts like 0xSplits or the Royalty Registry.
• Upgradeable Recipients: Allows the creator to update the recipient address post-deployment, providing flexibility for long-term project management.

A key challenge is royalty bypass, where traders use platforms or mechanisms that do not enforce the creator's terms to avoid fees. This creates a tension between creator revenue and trader profit maximization, leading to marketplace fragmentation. The economic viability of royalties often depends on a collection's brand strength and community's willingness to use enforcing marketplaces.

Royalties transform digital assets into ongoing revenue streams. They align long-term incentives between creators and collectors, as creators benefit from the asset's appreciation in the secondary market. This model is central to the creator economy on blockchain, enabling new business models for artists, game developers, and intellectual property holders beyond the initial sale.

EIP-2981 is the primary Ethereum standard for on-chain royalty information. It defines a simple, gas-efficient function (royaltyInfo) that marketplaces can query to determine the recipient and amount for any token sale.

• Key Function: function royaltyInfo(uint256 tokenId, uint256 salePrice) external view returns (address receiver, uint256 royaltyAmount)
• Purpose: Provides a universal interface, separating royalty logic from the core NFT contract (ERC-721/1155).
• Adoption: Widely supported by major marketplaces like OpenSea and LooksRare to honor creator-set fees.

A technical approach where royalty logic is embedded directly into the NFT's smart contract to make fees non-optional. This often uses transfer restrictions or fee-on-transfer mechanisms.

• Examples: Manifold's Royalty Registry, 0xSplits, and custom transfer functions that revert if a fee isn't paid.
• Mechanism: The contract itself validates and routes payments during any transfer, making it harder for marketplaces to bypass.
• Trade-off: Increases contract complexity and can conflict with certain DeFi composability patterns.

The prevalent model where marketplaces voluntarily choose to read and enforce the royalty information provided by standards like EIP-2981. Enforcement is not guaranteed at the protocol level.

• Reality: Many marketplaces, especially newer or aggregator platforms, allow buyers to set royalty payments to 0% to reduce cost.
• Result: Creates a race to the bottom on fees, fragmenting ecosystem support and reducing reliable creator income.
• Driver: Competition for trader liquidity often leads to optional royalty support as a feature.

Supplementary infrastructure designed to strengthen royalty enforcement across diverse marketplaces and contracts.

• Royalty Registries: Centralized on-chain directories (e.g., Manifold's) that override an NFT's native royalty info, allowing for updates and corrections.
• Operator Filter Registries: Systems like OpenSea's allowed a collection to block sales on marketplaces that don't enforce royalties, though this approach has seen reduced usage.
• Purpose: These tools attempt to create a unified, updatable layer of royalty logic for the entire ecosystem.

On Solana, the Metaplex Protocol defines royalty behavior through its core programs.

• Key Standard: The Metaplex Token Metadata program includes a seller_fee_basis_points field and a list of creators with shares.
• Enforcement: Historically enforced at the protocol level for primary sales; secondary sales rely on marketplace compliance with the standard.
• Evolution: Similar to Ethereum, optional enforcement by marketplaces has led to tools like Creator-Led Royalty Enforcement for stronger guarantees.

The rise of the Blur marketplace significantly disrupted royalty norms by initially making royalties optional and later implementing a tiered enforcement system.

• Model: Blur's model ties full royalty payments to loyalty points and staking, making them effectively optional for casual traders.
• Impact: Forced other major marketplaces to adopt similar optional models to remain competitive, leading to a sharp decline in reliably paid royalties across the ecosystem.
• Data Point: This shift demonstrated the fragility of marketplace-voluntary enforcement models.

Royalty enforcement is split between on-chain and off-chain models. On-chain enforcement uses smart contract logic (e.g., the royaltyInfo function in ERC-2981) to mandate payments, but requires marketplace compliance. Off-chain enforcement relies on marketplace policy, social consensus, and creator blocklists, making it voluntary and fragile.

The primary challenge is that secondary marketplaces are not obligated to read or respect on-chain royalty specifications. Major platforms can bypass fees by executing trades outside the standard sale flow (e.g., using transferFrom instead of a marketplace contract). This creates a race to the bottom where marketplaces compete by offering zero-fee trading to attract volume.

Several technical solutions attempt to enforce royalties programmatically:

• Transfer Restrictions: Smart contracts that block transfers to non-compliant marketplaces (e.g., creator-enforced blocklists).
• Royalty-Enforcing Protocols: Layer-2 solutions or alternative standards that bake fees into the settlement layer.
• Owner-Operator Models: Where the NFT contract itself acts as the primary marketplace, controlling all sales. These models often trade off between enforcement strength and liquidity/friction for users.

In the absence of reliable technical enforcement, creators use social and reputational tools:

• Allowlists & Blocklists: Publicly listing marketplaces that do or do not respect royalties.
• Utility Gating: Restricting access to future drops, communities, or physical goods to holders who purchased through royalty-respecting channels.
• Licensing Threats: Leveraging copyright law by licensing artwork separately from the NFT token, with terms tied to royalty payment.

EIP-2981 (ERC-2981) is a widely adopted standard for signaling royalty information on-chain. It provides a standardized interface (royaltyInfo(uint256 tokenId, uint256 salePrice)) that returns the recipient address and royalty amount. However, it is a signaling standard, not an enforcement mechanism. Future proposals aim for stricter enforcement at the token or protocol level.

The royalty dilemma is a game theory problem. Rational actors (sellers, buyers, marketplaces) have incentives to avoid fees. This leads to:

• Arbitrage Opportunities: NFTs being sold on no-royalty markets for a marginally lower price.
• Fragmented Liquidity: Trading volume spreads across compliant and non-compliant venues.
• Long-Term Value Question: Whether enforceable royalties are necessary for sustainable creator ecosystems or if alternative monetization models will emerge.