Nov 1, 2021

9 min read

Can NFT’s generate royalties ?

Innovation in “on chain” capability is changing the paradigm when it comes to generating royalties for NFTs on Ethereum

NFTs are changing the way we understand ownership on the internet. Community managed ownership has a ton of benefits, but what happens when a creator wants earnings in perpetuity for his/her creation?

In other words, wants to earn royalties to retire in the sun and sand of the Bahamas.

This is not an easy problem to solve. Royalties are complex things and the truth is that while the pace of innovation has been breathtaking in the NFT world, royalties have still mostly been confined to individual experiments across a few platforms.

So what are these?

Let’s start with understanding a little more of where the complications lie when it comes to NFT and royalties.

The problem of interoperability

Right now, most NFTs are minted as ERC-721 tokens, which means that when an artist initially sells their work to a buyer, that will be the only time they receive money for the sale. If the buyer then flips it on a secondary market like OpenSea for 5 times the price, the original artist sees none of that.

For royalties to be paid, interoperability of platforms is crucial
All platforms need to recognise the IP of the original work and pass on parts of profit from future sales, irrespective of whichever platform it gets sold from in perpetuity.

Let’s elucidate with an example: Today when you watch “The Office” on Netflix Or Amazon Prime or whichever streaming platform, each platform pays royalty for the re-runs. Because each of these are controlled by one standard protocol around copyright and ownership.

However, in the NFT world interoperability of platforms is not a given. Hence, royalties are also not a given when it comes to NFTs as of this moment.

Will future innovations in Ethereum solve for NFT royalties?

Well a ton of work is happening.

Smart contract standards remain the loci for innovation on Ethereum. They continue to attract entrepreneurs attempting to program differentiated value formats to smart contracts that can facilitate newer ways of transaction on the internet. The ERC-721 standard that led to the booming market of NFTs is now being revised to allow for a more dynamic standard for paying out royalties, irrespective of the platform that mints the NFT.

So what are the use cases solving for this?

Let’s start with our first used case called Treum, which has created a project called EulerBeats.

The Euler Record is a limited edition set of algorithmically generated art + music based on the Euler number and the Euler’s totient function. Genesis (27 NFTs) and Enigma (27 NFTs) are two sides of the Euler Record. The EulerBeats smart contract extends the ERC-1155 Ethereum multi-token standard to create non-fungible unique original tokens and a set of fungible print tokens for each original. Both releases share a common mathematical basis, but differ in art, music, and bonding curve structures. Each original NFT has a limited set of prints priced on a bonding curve.

The token is the art piece in itself. Everything needed to re-create each masterpiece is stored on-chain on Ethereum. EulerBeats is a creative ensemble of math, art, music, royalties, instantly liquid tokens, and scarcity into one creation.

So why is this experiment so unique when it comes to royalties?

Well its programmed in such a way that as the number of prints in circulation grows for a particular original, the price of issuing its next print increases at an exponential rate. These NFTs use a modification of the ERC-721, called the ERC-1155. This modification of using multi tokenism makes it possible that for every future sale, the original LP holder gets a royalty of 8%, with another 2% going to Treum .

In their experiment in the first two weeks, the smart contracts governing the unique LPs paid out 912 ETH ($1,429,012) in royalties, automatically.

Unlike other NFTs where the metadata is hosted on a centralised web server, in EulerBeats the metadata of the music and image is contained within the token implementation itself.
The data and the script to re-generate the art and music are stored on the Ethereum blockchain.
If the EulerBeats website were ever to shut down, you can still use the seed and the script to generate your art and the beat.
The aim of this project is to keep all data and logic required to construct the art and music permanently on Ethereum for eternity.
It’s a pioneering use case of pushing the boundaries of “on-chain” NFTs storage by placing the “recipe” for art, music, and economics into an Ethereum block.

Source: Link

Can ERC-1155 thereby solve for royalties?

Well yes and no. Depends on how you want to use it. To do that, let’s start with a brief understanding of what ERC -1155 actually is from a technical point of view. (please don’t feel stressed by all these naming conventions. It’s just specific rules and capabilities programmed within the code to create different functionalities on Ethereum)

Token standards like ERC-20 and ERC-721 require a separate contract to be deployed for each token type or collection. The ERC-721 standard’s token ID is a single non-fungible index and the group of these non-fungibles is deployed as a single contract with settings for the entire collection. This limits certain functionality by the nature of separating each token contract into its own permission address. This is why paying royalties on ERC -721 is difficult, because if the art transcends platforms payments cannot always be linked back to the original address due to possible lack of interoperability between platforms.

In contrast, the ERC-1155 Multi Token Standard allows for each token ID to represent a new configurable token type, which may have its own metadata, supply and other attributes. New functionality is possible with this design such as transferring multiple token types at once, saving on transaction costs. Trading (escrow / atomic swaps) of multiple tokens can be built on top of this standard and it removes the need to “approve” individual token contracts separately. It is also easy to describe and mix multiple fungible or non-fungible token types in a single contract.

However, ERC-1155 is not specific to any particular use case and many applications can benefit from this flexibility. The Euler team just used it to solve for royalty and a host of other things.

Second use case

It’s not however necessary for having a different protocol to solve for royalties (as long as you are happy to be operating within a walled garden) Royalties can also be solved for in creative ways using ERC -721 itself, as long as trade and transaction happens within the same platform.

Example here is Zora. A universal media registry protocol. It’s a way for creators to publish creative media, earn money on their work, and have others build and share what they create. They have now created a new NFT platform for creators of all types. Each artist that mints NFTs on the Zora platform can set a “creator share” which is a percentage that they will receive for all future sales. Let’s say their creator share is 10%. If the original is sold for 0.5 ETH, and then someone later sells that for 10 ETH, the creator would receive an additional 1 ETH for the secondary sale. Also, because these creator shares are automatically paid out with smart contracts, and auditable on Ethereum, the creator never has to worry about tracking them down: they just get paid in perpetuity to their original Ethereum address that they minted the NFT with. This is a powerful concept akin to royalties in the music world, but automatic and auditable.

There is one problem, though. Currently the method that Zora uses for paying creator shares is not reproducible on secondary markets. The creator share percentage is only paid out if the secondary sale also occurs on Zora.

ZORA NFTs explicitly separates contentURIs and metadataURIs and provides a sha256checksum for each
This allows anyone the ability to quickly verify the integrity of the data at any time if a URI has been updated
In order to allow the ZORA community to integrate with metadata schema, they provide a media metadata schema repository, that can serve as the source of truth for community supported metadata schemas
They are defined as JSON schemas, and generate Types, Parsers, Generators, and Validators that are automatically served through the ZDK

Is there a “Royalty Standard” being created on Ethereum ?

While innovations like the ones stated above are very important to build the future, fact is, for widespread adoption of NFT by artistes of all kinds, royalties need to be solved for and made into a standard.

There is a need for a standardised protocol on Ethereum chain which allows for this to become mainstream.

Fortunately, the “Ethereum Improvement Proposal” or EIP-2981 aims to do just that.

Authored by Zach Burks, James Morgan, Blaine Malone, and James Seibel the “Ethereum Improvement Proposal” or EIP-2981 aims to to create an ERC-721 “Royalty Standard”. The main motivation of this is to create a modified NFT standard so that NFTs created, purchased, or sold on one marketplace still pay out royalties regardless of the next marketplace it is sold on. With this standard, it would be possible for the artist to set a royalty amount that can be paid to the creator on any marketplace that implements these token.

So what is the “ERC 721 Royalty Standard” in summary?

This standard allows NFTs that support ERC-721 and ERC-1155 interfaces, to have a standardized way of signalling royalty information
More specifically, these contracts can now calculate a royalty amount to provide to the rightful recipient
If a marketplace chooses not to implement this EIP, then no funds will be paid for secondary sales
It is believed that the NFT marketplace ecosystem will voluntarily implement this royalty payment standard; in a bid to provide ongoing funding for artists/creators
NFT buyers will assess the royalty payment as a factor when making NFT purchasing decisions
While this standard focuses on NFTs and compatibility with the ERC-721 and ERC-1155 standards, EIP-2981 does not require compatibility with ERC-721 and ERC-1155 standards. Any other contract could integrate with EIP-2981 to return royalty payment information
ERC-2981 is, therefore, a universal royalty standard for many asset types

What I still cannot wrap my head around just yet?

I love new technology. It inevitably brings with it cultural winds of change and often transforms the way we live. So, the excitement and hype amidst early adopters of Web 3.0 is infectious. I am excited.

But this entire exercise is for me to document my self-learning. I love that the Ethereum community is moving towards solving for royalties, but my main question is why do we need it?

What is the problem around royalties that the Ether blockchain is solving which isn’t already solved for?

Artistes launching art or music today get paid royalties even if they are not on the blockchain. If you want to buy music from an artiste without paying a label or a distributor, all the artiste has to do is to go independent and sell his music directly online, and you can buy it without paying any intermediary.

The artiste doesn’t need to be on a blockchain for that.

A few years ago comedian Louis CK cut out all intermediaries, booked a theatre and sold tickets to his own show, online. He got sold out in days. He didn’t need a blockchain for that.

Mind you, it’s not that I don’t understand the allure and benefits of NFTs from a theoretical perspective. But the creator economy is already on us and tons of creators are making a living directly off their fans (patreon, substack, as examples).

Most of them are not on any blockchain.

So while am thrilled in one sense that an Ether protocol will allow interoperability across platforms for royalties to be shared. It is definitely making transaction on Ethereum easier, but I am still not sure what practical real world problem this innovation is actually solving for now.

Sources:

About Me:

In my day job I drive product marketing and growth @ Google

For the next few months I will use this publication on Medium titled Metapherse to curate my experiences of learning web 3.0 in the open.Follow me on twitter @hackrlife or on my substack on all things Web 3.0 here.