March 17, 2022

Can you enforce NFT royalties? tl;dr Nope

Incompatibilities between marketplaces and voluntary payment means it's a roll of the dice

When it comes to royalties in NFTs, there is still quite a few questions and misconceptions.

The prevailing wisdom is that the original minter of an NFT, the artist, should get some royalties. OpenSea lets you carve out 10% and Rarible up to 50%. This is great! And it's been a boon to artists everywhere as they now get to see royalties on their work after the first sale.

While royalties are specified in the NFT contracts, there is no mechanism to enforce payment. That is because there is no way to distinguish an NFT transfer and a sale. More importantly, voluntary royalty payments differ from marketplace to marketplace and are often times not compatible.

The conversation goes something like this (taken from EIP2981):

Artist: “Do you support royalty payments on your platform?”

Marketplace: “Yes we have royalty payments, but if your NFT is sold on another marketplace then we cannot enforce this payment.”

Artist: “What about other marketplaces that support royalties, don’t you share my royalty information to make this work?”

Marketplace: “No, we do not share royalty information.”

As such, the folks in the Ethereum community put together a new specification (EIP2981) to address royalty and payment information that is currently gaining adoption (OpenSea supports this already).

The motivation is simple:

There are many marketplaces for NFTs with multiple unique royalty payment implementations that are not easily compatible or usable by other marketplaces. Just like the early days of ERC-20 tokens, NFT marketplace smart contracts are varied by ecosystem and not standardized. This EIP enables all marketplaces to retrieve royalty payment information for a given NFT. This enables accurate royalty payments regardless of which marketplace the NFT is sold or re-sold at.
Many of the largest NFT marketplaces have implemented bespoke royalty payment solutions that are incompatible with other marketplaces. This standard implements standardized royalty information retrieval that can be accepted across any type of NFT marketplace. This minimalist proposal only provides a mechanism to fetch the royalty amount and recipient. The actual funds transfer is something which the marketplace should execute.

The key statement here is the last sentence: "The actual funds transfer is something which the marketplace should execute."

EIP2981 wraps up saying:

"As royalty payments are voluntary, entities that respect this EIP must pay no matter where the sale occurred - a sale outside of the blockchain is still a sale."

As it stands today, something minted and sold on Rarible won't see royalty payments if that NFT is then sold on OpenSea and vice versa. "Future Marketplace X" might spin up a royalty-free platform to sell NFTs and there is nothing to stop them or the non-payment of royalties. Doing so would likely incur the ire of the entire NFT community but it is still technically possible to not pay these royalties.

It seems like there is a unique opportunity to spin up a DAO to help manage/regulate what the big marketplaces are doing. It might even be a great opportunity for them to work together on guiding some of the work the federal government in the US is doing to try to regulate and understand this fast moving market.

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