NFT Royalties Enforcement: On-Chain vs Off-Chain

Summary:
This comprehensive guide delves into the technical intricacies of enforcing NFT royalties through on-chain and off-chain mechanisms, providing decision-makers with practical insights, best practices, and real-world examples to optimize royalty compliance in their blockchain projects.

---

Introduction

NFT royalties have become a cornerstone of digital asset monetization, enabling creators to earn recurring revenue from secondary sales. However, enforcing these royalties remains a nuanced challenge, especially as marketplaces and platforms adopt differing approaches. This post explores the core technical differences between on-chain and off-chain royalty enforcement, highlighting their advantages, limitations, and best practices for startups and enterprises.

---

Understanding NFT Royalties

What Are NFT Royalties?

NFT royalties are predefined percentages of secondary sale proceeds automatically paid to the original creator or rights holder when an NFT changes hands. These royalties incentivize creators and foster sustainable ecosystems.

Why Enforcement Matters

Without enforced royalties, marketplaces may ignore creator rights, leading to revenue loss and discouraging creator participation. Proper enforcement mechanisms safeguard creator interests and ensure compliance.

---

On-Chain Royalty Enforcement

How It Works

On-chain enforcement embeds royalty logic directly into the NFT smart contract. When an NFT is transferred or sold, the contract automatically triggers the royalty payment process based on predefined rules.

Key Technologies & Standards

• ERC-2981: The most widely adopted royalty standard on Ethereum, allowing NFTs to specify royalty info that marketplaces can query directly.
• NFT Smart Contract Design: Custom contracts can include royalty logic with functions like

  calculateRoyalty()

  and

  distributeRoyalty()

  .

Practical Implementation

pragma solidity ^0.8.0;

import "@openzeppelin/contracts/token/ERC721/ERC721.sol";

contract OnChainRoyaltyNFT is ERC721 {
    address payable public creator;
    uint96 public royaltyFee; // basis points (e.g., 500 = 5%)

    constructor(address _creator, uint96 _royaltyFee) ERC721("RoyaltyNFT", "RNFT") {
        creator = payable(_creator);
        royaltyFee = _royaltyFee;
    }

    function royaltyInfo(uint256, uint256 salePrice) external view returns (address receiver, uint256 royaltyAmount) {
        receiver = creator;
        royaltyAmount = (salePrice * royaltyFee) / 10000;
    }

    // Override transfer functions if necessary for custom logic
}

Advantages

• Immutable & Transparent: Royalties are enforced via smart contract logic, reducing disputes.
• Market Compatibility: Standards like ERC-2981 are widely supported by marketplaces such as OpenSea, Rarible.
• Automation: Royalties are automatically paid without intermediaries.

Limitations

• Marketplace Adoption: Some marketplaces ignore ERC-2981 or modify standards, leading to inconsistent enforcement.
• Upgradability: Once deployed, smart contracts are immutable; fixing bugs or updating royalty logic requires proxy patterns or upgradeable contracts.
• Complex Royalties: Multiple rights holders or tiered royalties are harder to implement purely on-chain.

---

Off-Chain Royalty Enforcement

How It Works

Off-chain enforcement relies on external systems, APIs, or middleware to manage royalty payments. Marketplaces or platforms track sales off-chain and trigger payments via backend logic.

Common Approaches

• Marketplace Agreements: Royalties are enforced through contractual terms and platform policies, not technically embedded.
• Backend Payment Systems: APIs that process royalty payments post-sale based on blockchain event data.
• Off-Chain Metadata & Signatures: Using cryptographic signatures to verify rights and authorize royalty payments.

Practical Example

Suppose a marketplace records sales on-chain but processes royalties off-chain:

• When an NFT is sold, the marketplace emits an event.
• A backend service listens to these events.
• The service calculates royalty amounts based on predefined rules.
• Payments are processed via traditional payment channels or blockchain transactions (e.g., via a custodial wallet).

Advantages

• Flexibility: Easier to implement complex royalty structures (multiple recipients, tiered royalties).
• Market Compatibility: Works with platforms that do not support on-chain standards.
• Easier Upgrades: Logic can be updated without deploying new smart contracts.

Limitations

• Trust & Transparency: Relying on off-chain systems introduces trust assumptions.
• Potential for Non-Compliance: Without enforceable smart contracts, marketplaces may ignore royalty obligations.
• Increased Complexity: Requires robust off-chain infrastructure and reconciliation mechanisms.

---

Comparing On-Chain and Off-Chain Royalties

---

Practical Examples & Case Studies

Example 1: OpenSea’s Implementation (On-Chain)

OpenSea supports ERC-2981, allowing creators to specify royalties directly in their NFT contracts. When a secondary sale occurs, OpenSea automatically invokes the

royaltyInfo()

function to determine the royalty recipient and amount.

Impact:
Streamlined royalty distribution, minimal manual intervention, and cross-market consistency.

Example 2: Rarible’s Off-Chain Royalties

Rarible enables creators to set royalty info in off-chain metadata, which is then verified via cryptographic signatures. Payments are processed through a dedicated backend system, not embedded in the NFT contract.

Impact:
Greater flexibility for complex royalty rules, but requires trust in Rarible’s infrastructure for enforcement.

Example 3: Custom Hybrid Approach

Some projects combine on-chain and off-chain mechanisms: use ERC-2981 for standard sales, supplemented by off-chain agreements for special cases like exclusive licensing or tiered royalties.

---

Best Practices for Royalty Enforcement

For Startups & Enterprises

• Standardize on ERC-2981: Adopt established standards to maximize marketplace compatibility.
• Design Upgradable Smart Contracts: Use proxy patterns to update royalty logic post-deployment.
• Implement Multi-Recipient Royalties: Leverage multi-signature wallets or royalty splitting contracts.
• Combine On-Chain & Off-Chain Logic: Use on-chain enforcement for primary sales, off-chain for complex arrangements.
• Integrate with Marketplace SDKs & APIs: Ensure your contracts are compatible with major platforms like OpenSea, LooksRare, and Rarible.
• Audit & Test Rigorously: Regular security audits prevent exploits that could bypass royalties.

For Off-Chain Systems

• Ensure Transparent Reconciliation: Use cryptographic signatures and transparent APIs.
• Maintain Immutable Records: Store sales data on-chain or in tamper-proof logs.
• Establish Clear Contracts: Define rights and payment terms explicitly in smart contracts or legal agreements.
• Implement Fail-Safe Mechanisms: Have fallback procedures if off-chain systems fail.

---

Challenges & Future Directions

Current Challenges

• Marketplace Non-Compliance: Not all marketplaces support or honor royalties.
• Fragmentation: Diverse standards and practices hinder universal enforcement.
• User Experience: Balancing royalty enforcement with seamless user interactions remains complex.

Emerging Trends

• Universal Royalties Standards: Projects like EIP-2981 aim to unify enforcement.
• Marketplace Policies: Platforms increasingly enforce royalties via policy or technical measures.
• Layer 2 Solutions: Enable more flexible and scalable royalty enforcement on secondary layers.

---

Conclusion

Enforcing NFT royalties effectively is critical for sustainable creator ecosystems. While on-chain mechanisms like ERC-2981 provide a robust, transparent enforcement layer, they are not yet universally adopted, necessitating off-chain strategies for flexibility. Startups and enterprises should evaluate their specific needs, marketplace integrations, and user experience goals to implement a hybrid approach that balances automation, compliance, and adaptability.

Key Takeaways:

• Prioritize on-chain standards for broad compatibility and transparency.
• Use off-chain solutions for complex royalty arrangements and flexibility.
• Regularly audit and update your smart contracts and backend systems.
• Stay aligned with evolving standards and marketplace policies.

By adopting best practices and leveraging the latest standards, your organization can ensure fair, enforceable, and sustainable royalty streams for all stakeholders in the NFT ecosystem.

---

For tailored blockchain solutions and expert advice on NFT royalty enforcement, contact 7Block Labs – your strategic partner in blockchain innovation.