ERC721-C – a step towards saving creator royalties 

Web3 has promised creators unprecedented control over their intellectual property (IP) and the ability to monetize it directly. With smart contracts, creators can set the rules used to manage their creations's IP for both primary and seconday markets, leading to creators potentially receiving royalties on every sale. This transformative capability has been a powerful incentive for creators to embrace and experiment in the Web3 ecosystem.

However, the current NFT landscape has dimmed this vision and undermined one of its key selling points: royalties. The absence of a built-in royalty mechanism in the ERC721 and ERC1155 standards has posed challenges for implementing royalties across various marketplaces. Although the introduction of the EIP-2981 NFT Royalty Standard aimed to address this gap, it lacks a complementary enforcement mechanism for marketplaces. As a result, on-chain royalties have been treated more as a polite request than a binding obligation.

This situation has led to a concerning "race to the bottom" scenario across NFT marketplaces. In their quest for market share in a market characterized by fierce competition, even new players like X2Y2, LooksRare, Magic Eden, and Blur have resorted to zero-fee, royalty-optional trading. While this may appear appealing to buyers and traders in the short term, it undermines the long-term sustainability of the Web3 ecosystem and the creators it seeks to empower.

The challenges surrounding creator royalties present a significant threat to the widespread adoption of Web3. It impacts not only individual creators, who are deprived of their rightful earnings, but also discourages large IP owners from embracing Web3. Without well-defined and codified IP rights, these owners and creators have little incentive to transition their assets into the Web3 realm.

Enforceable and programmable royalties 

To address this gap, a new Ethereum iteration of the well-known standard ERC721 was created: the ERC721-C. This new iteration gives creators increased control over their NFT collections, specifically regarding royalties and customization options.

ERC721-C allows NFT collections (both newly established or pre-existing) to voluntarily opt into its implementation, enabling individual NFT holders to decide whether or not to adopt it. By embedding the royalty protocols directly onto the blockchain, circumvention put in place by marketplaces or other intermediaries becomes impossible, granting creators programmable royalties. Consequently, creators gain greater authority over the royalty payment structure and how they incentivize holders. This new standard also gives creators control over the trading destinations for their tokens, helping them to protect their brands and safeguard intellectual property.

Limit Break, the organization spearheading ERC721-C development, has whitelisted the addresses of several NFT marketplaces, including OpenSea, X2Y2, and Rarible. However, it is important to note that these marketplaces must actively incorporate the new token standard to activate this new royalty feature. If top marketplaces won’t support the new standard, Limit Break plans to establish its own NFT marketplace that fully supports ERC721-C.

The Creator Transfer Validator contract is currently available on the Ethereum Mainnet, Polygon, Sepolia Testnet, and Mumbai Testnet networks. 

The five steps needed for implementing the Creator Transfer Validator contract

Source: Limit Break

New use cases unveiled

As the adoption of creator token contracts expands within NFT projects, gaming (and potentially DeFi) numerous use cases start to emerge. Here are a few examples:

• Shared royalties: NFT creators can share royalties with their holders. This represents a remarkable approach to rewarding early adopters and fostering their loyalty. A conceivable arrangement could involve a 50/50 royalty split between the creator and their NFT holders.
  

• Minter-only royalties: royalties can be given exclusively to NFT minters, as an effective strategy for incentivizing buyers to engage in collection minting. For instance, for the initial ten sales in the secondary market, the first minter could retain all the royalties, subsequently reverting them back to the creator.
  

• Contingent royalties: royalties can be contingent upon specific criteria, ensuring payouts happen only when the secondary sale price surpasses the original mint price. This safeguard guarantees that royalties are paid exclusively when the NFT increases in value.
  

• Transferrable royalties: NFT creators can issue their holders a separate NFT that grants them the rights to royalty income. This can be a good option for NFT projects that want to give their holders more control over their assets. For example, an NFT creator could issue a royalty NFT that can be traded on secondary markets. Transferrable royalties could also be considered for use cases within the DeFi space, for instance with Pendle Finance. Can you imagine what possibilities could arise when creators gain the ability to trade royalties through Pendle’s yield-splitting mechanism?
  

• Skill-based royalties: NFT creators can assign royalties to token holders based on their skills in playing on-chain games. This mechanism effectively rewards players for their active participation and acts as an incentive for continued engagement.
  

• Effort-based royalties: NFT creators can assign higher royalty percentages to token holders who accomplish certain objectives, motivating players to partake in designated activities such as quests. For example, a creator might allocate an extra 10% royalty bonus to players who complete a designated number of quests.
  

These use cases merely scratch the surface of what is possible, with more innovations awaiting only for the broader adoption of the creator token contracts across different domains. 

Conclusion: a positive step forward for Web3 

Innovation in NFT standards sets the precedent for exciting new use cases which could lead to attracting more creators into the Web3 space. Despite encountering challenges associated with the novel standard, such as the integration of additional features and the need for marketplace adoption, it undeniably represents a positive step towards progress. Leveraging this new standard to safeguard intellectual property rights and ensure fair royalties for creators emerges as a key selling point within the industry, propelling us closer to mass adoption.

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