Digital Ownership

For a recap on what web3 is, check out this link.

As I’ve written before, crypto at its core is not financial. It’s economic. It allows for the transfer of value.

The most valuable things in the world are not financial.

Time. Attention. Relationship. Identity. Culture.

Cryptographic technologies and web3 allow for these things to be owned, traded, earned, and allocated.

The primary way that these things (and financial assets as well, for what it’s worth) are owned, traded, earned, and allocated are via smart contracts: programs and applications that are executed on blockchains like Ethereum that have a computing layer (in this case, the EVM or Ethereum Virtual Machine).

NFTs, tokens, and DAOs are all smart contracts that can encode not only digital ownership and belonging, but also rights and royalties.

Smart contracts allow for true digital ownership of any arbitrary data to be encoded for public consumption.

Smart contracts essentially embody Lawrence Lessin’s code is law” assertion in 2000 - they are not only the legislation” of the digital sphere, but they also are self-enforcing. There is no authoritarian regime or agency responsible for making sure that digital laws are followed.

So how does getting paid for ownership work (namely royalties)?

ERC-2981 is the Ethereum standard for encoding NFT royalties into Ethereum-based smart contracts.

And it seems to work: Ethereum is responsible for over $1.8 billion in NFT royalties to date.

But there’s a secret in the industry…by and large, royalties are not enforced at the smart contract layer.

Sure, there’s a minor problem with ERC-2981 as a standard”: it’s an opt-in standard, as it must be in a decentralized, cooperation-based environment like blockchain development.

But namely, the issue here is the incentive structure for marketplaces: they need to attract sellers, and sellers will prefer zero-to-low royalties.

And the marketplaces have to enforce royalty payouts according to the published standard.

But they largely don’t. They implement their own.

This means that there are multiple standards” for royalty payments in NFT contracts.

To date, the power rests with the marketplaces, not the creators or even contract developers.

Marketplaces have to agree to, adhere to, and enforce the standards…but the incentives aren’t there.

The state of royalties in the year 2022? Royalties are still fairly centralized in the hands of the marketplaces and the market-builders.

Code is not yet law.

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Disclaimer: as always, this space is moving extraordinarily fast, and the information contained in this post may be rendered outdated within hours of its posting. Definitely do your own research…but also feel free to follow and ping me on Twitter, Farcaster, or LinkedIn. Happy to chat!

web3 crypto

November 2, 2022