Unlocking A Digital Ownership Revolution
How to incentivise creators and publishers to create long term value for collectors with ERC-2665
The advent of blockchain and Non-Fungible Tokens (“NFTs”) has marked a decisive paradigm shift in how we see digital content. Since the birth of digital content, creators have only been able to monetise their work by (1) selling ads (e.g. Youtube, Instagram, TV, radio) or (2) selling access to the digital content itself (e.g. Netflix, Pay Per View, Shutterstock, Patreon, HBO). Thanks to blockchain technology and NFTs, digital content can now be turned into a unique, collectible, tradable asset that people can own, showcase, and trade.
Whilst the concepts of digital scarcity and digital ownership are far from widespread, the NFT ecosystem is developing at a fast pace and we are witnessing the beginnings of a new content model for the internet, where creators can sell digital creations the same way that an artist can sell a physical painting today. But for this model to thrive, we need creators and publishers to be incentivised to take the step. The Bitcoin and Ethereum blockchains as we know them would not exist if miners fees were optional. Maybe you would be happy to pay for these fees to support the chain even if they were optional. So would I. But how many miners would invest the time and effort to become a node today if they had no idea whether they will make money tomorrow? One of the great strengths of the blockchain is the ability to build new ways to align the interests of all the stakeholders in any particular project. A good example is tokenized ownership compared to traditional share equity. This is the same for NFTs: the right incentivization structures will unlock a digital ownership revolution pushed by creators and publishers, and build the next generation of digital content platforms.
Aligning Interests In The Long Term
Allowing an NFT to be transferred for free de facto limits the ways the creator and/or publisher can make money to (1) the initial sale revenue and (2) fees collected from employing the token’s utility value (e.g: siring Cryptokitties). This model is suited for games, but not for NFTs whose value derives from their intrinsic collectability (e.g. art, memorabilia). If the creator and publisher of such a collectible cannot make money after the first sale, they will have little incentive to continue delivering value to the collectible over the long term. And with this misalignment of interests will come a business model that disfavors collectors.
Trading card games are a good example of how a collectible manufacturer maximises revenue when they can only make money from the first sale: A first set of cards is released and sold in randomized “booster packs” with artificial scarcity created for the most powerful cards. This forces collectors to buy more of the collectibles in order to get the cards with the highest utility value. Once the initial sales start to weaken, the trading card game company releases a new set of cards with slightly higher utility value. This new set will gradually phase out the previous set, which will drive the value of existing cards down, and push collectors to buy the new set of booster packs. It does not have to be that way. With blockchain technology and smart contracts, we have the opportunity to create new business models where collectors, creators and publishers can all benefit from the long-term value of a digital collectible.
Cryptograph was built around the idea of incentivising creators and aligning the interests of all stakeholders to bring long-term value for collectors. Each Cryptograph generates proceeds every time it is sold, gifted, or an incentive is paid to a bidder, and all proceeds are always split between the creator, a charitable cause of the creator’s choice, and Perpetual Altruism, the company behind Cryptograph. All parties benefit from each Cryptograph being valuable and impactful in the long term. In order to make this creator-first and sustainably philanthropic model work, we had to ensure that transfers are always payable. Because we believe in the potential of this feature, we decided to suggest a standardized interface so that other NFT projects can experiment with payable transfer functions.
Building on the ERC-721 standard
ERC-721 has become the de-facto standard to read and trade non-fungible tokens. Although payable transfers are part of the ERC-721 specifications, they have been rarely implemented to date. We think one of the main technical reasons for this is that the ERC-721 standard is very generic: without a function that returns the transfer price as part of the standard, a payable transfer function cannot be practically implemented. Previous ERC-721 extension proposals described ways to incentivise content creators. However, they often required a fundamental change in the transaction flow of NFTs. The current NFT ecosystem and standards are already proven, and fundamental changes are not needed to solve this issue.
Our solution was to publish a minor extension of the ERC-721 standard that allows publishers to specify if a transfer fee should be paid with every transfer: ERC-2665. This extension exposes a queryable transfer fee that needs to be paid in order for a transfer to be processed, and allows both wide interoperability and strong creator/publisher incentivisation. Because it is an extension, every ERC-2665 token follows the ERC-721 standard to the letter. Only minimal changes to existing code are necessary for wallets and decentralised trading platforms (e.g. Opensea) to build the user experience required for ERC-2665 tokens, and collectors can fully benefit from its interoperability. The ERC-2665 interface is also generic, allowing publishers to specify not only the transfer fee amount, but also its currency, how it is calculated and even where to fetch this information from.
Cryptographs are the first NFTs to use the ERC-2665 implementation, with the transfer fee of a Cryptograph being calculated as a percentage of its last sale price, transparently and on-chain. Each Cryptograph (like any ERC-2665 token) is still a fully-fledged ERC-721 token: you can design operators, approve an address, and use various types of transfer functions (unsafe, safe, safe with data overloading).
The ERC-2665 extension will give publishers more options as to the different kinds of NFTs they can create and we hope it will be a valuable contribution to our burgeoning space. Let’s get building!