ImmutableX, the leading Layer 2 scaling solution for NFTs on Ethereum today announces plans to extend its enforceable royalties model across the web3 ecosystem, starting with Ethereum. The move represents the first step in establishing industry-wide standards around enforceable royalty payouts.
The subject of creator royalties has bubbled to the surface of late as numerous non-fungible token (NFT) marketplaces opted to make royalty payments optional — or remove them altogether — in an effort to compete on fees. Scrapping royalties fees could carry profound implications for NFT monetization, not least for creators who rely on them as a source of income.
However, the issue remains that it is inherently challenging to enforce creator royalties without some level of centralized control or without impairing standard transfer functionality. Existing NFT royalty standards, such as EIP-2981, serve as a decentralized mechanism for marketplaces to discover the intended royalties but provide no enforcement mechanism — leaving NFT royalty payouts to the discretion of marketplaces.
Immutable has already implemented enforceable royalties via its application-specific Layer-2 solution, ImmutableX. Immutable is planning to extend this functionality to Ethereum through a community-governed whitelist and blacklist for smart contracts that honour royalty fees. NFT creators will be able to use these lists to control the smart contracts which can transfer or receive NFTs from their collection, ensuring that users will only be able to trade through royalty-respecting contracts. To ensure that these lists are not a centralising factor, the lists will be governed by $IMX token holders.
However, this design has the potential to reduce automatic composability with new NFT trading smart contracts. Blacklists preserve more automatic composability, at the cost of less enforceability compared to whitelists. Immutable believes that creators should be able to choose where their project falls on this spectrum. More aggressive protection may be an acceptable trade-off for many games and artists, who mostly use a few core smart contracts and base their business models on royalty protection.
"Our vision is an ecosystem where creators have a choice over their royalty model and level of enforceability, and users can vote with their feet when it comes to the projects they feel strike the best balance. Soft-enforced royalties only serve to punish users who are trying to support projects and massively reduce the confidence creators and game studios can have in their revenue streams. Royalties, structured correctly, provide significant long-term incentive alignment," said Alex Connolly, Co-Founder & CTO of Immutable.
Immutable believes that creators, users, and marketplaces should explore the royalty design space together. To this end, Immutable aims to form a working group with key industry leaders, including NFT marketplaces, games, and creators, to establish this enforceable royalties mechanism as a standard.