Blockchain, Royalties, and Dreams

Introduction

Royalties. *Sigh*

As someone who is not a big fan of the concept of divine birthrights I am therefore also not a big fan of the origin of the word royalties, but as an inventor and author I appreciate the concept that they enshrine very much.

Back in the middle-ages, royalties used to be a tax levied by the monarch of Great Britain on gold and silver dug out of the ground, and hence the name. The mines were the property of the Crown, and could only be mined in return for a payment proportional to the profit made.

These days, the term applies to payments made to an individual or a company in order to use their assets — typically intellectual property such as copyrighted materials: music, books, or movies, but also other things like franchises. And the term is still applied to payments made for the exploitation of natural resources obtained from land owned by someone else.

Collective management

In 2017 or so I worked for a while with Teosto, the Finnish collective management organization (CMO), which handles royalties for musicians, composers, and songwriters in Finland. As CMOs go, Teosto is probably one of the most innovative and forward-looking collection societies in the world, but unfortunately they are also based in a country of a mere 5 million people, and so the rest of the world doesn’t pay much attention to them.

In the process of working for Teosto, along with a free trip back to London and therefore the opportunity to eat a decent curry for the first time in years, I also learned quite a bit about how the collection of royalties works for most creators of artistic works in this northern country. Which has a lot of great musicians and artists, but very few decent Indian restaurants.

Teosto connects into a complicated and churrigueresque international system, requiring different CMOs (the most well-known being ASCAP, PRS, and SACEM) established in different countries, to collaborate on the basis of what amounts to an honor system. Back then in 2017, this is what made Teosto think that a blockchain system might be relevant to their industry.

A brief history lesson

The earliest CMOs appeared in the middle of the 19th century, and sprung up to handle the complexities of royalty collections on behalf of artists, who presumably want to be spending their time creating more music, rather than chasing up payments for the use of their work.

There are now hundreds, if not thousands of these CMOs across all creative industries. As you can imagine, given the long history these collection societies have, the systems that they have evolved to handle the collection and redistribution of royalties are, quite frankly, baroque, bureaucratic, slow, and expensive.

If, four years ago, a German band of musicians played a cover song by a Finnish songwriter in a French bar, it could take … well … until today for the money due as a royalty (or rather, about 60% to 70% of the money, as there are of course fees) to make its way into the bank account of said songwriter.

I doubt that things have gotten more efficient or cheaper since then.

The knight in shining code

Enter blockchain and smart contracts.

The big hope in the minds of some technically able people has been that, somehow, a transparent and open financial system with an underlying unit of accounting that carries value could be used to automate the collection and distribution of royalties. That would mean no more need for CMOs, or for their commission for handling all of this.

Furthermore, this is a dream that a particular niche in the creative world has been sold by the blockchain world, namely the world of representative art, through the medium of non-fungible tokens (NFTs).

Art is a logical first stepping stone, because when it comes to a photograph or a painting, there is no expectation of a “pay per view” for the picture in the way that there is for a song, sound-file, or a movie file. If you are a wealthy owner of a painting by a Flemish or Italian master, and you allow a museum to put it on display, there is generally not a charge to the visitors for viewing that specific painting.

The pride is in the ownership, and the profit is in selling on the painting when the artist becomes more famous. And so there are no pesky digital rights management issues when it comes to the ownership and subsequent sale of the ownership of such works.

But there are royalties due. I am aware of laws in France and Australia that require the sale of a painting to involve a payment of a standard royalty back to the original artist. In France it involves a complicated sliding sale with a cap of 12 500€, and in Australia it is typically 5% of the sale price, provided the sale is not a private one.

Grey victory

Unfortunately, NFTs don’t solve the problem, and I am not convinced they ever will. Imagine that I possess a highly valuable NFT on the Ethereum blockchain, and I transfer it.

1. I could be transferring it to another one of my Ethereum addresses because I want to keep it safe and separate from my main, rather messy address that I use to interact with all sorts of potentially unreliable contracts out there. So no royalty is due.
2. I could be transferring it to another buyer, and receiving payment through a separate channel, such as the traditional banking system, or bitcoin, or even a payment in ether, that is completely disconnected from the transfer. How will you know that this transfer is different from the one described in the point above? You can’t.
3. I could sell it through an NFT marketplace. The big ones respect royalties. They have to — they are like the Sotheby’s or Christie’s of the blockchain world, and their brand and reputation is worth more to them than enabling a couple of dodgy NFT dealers to evade royalty payments. Or so you hope, as a fledgling artist launching your first NFT collection with the help of an honest smart contract programmer or web3 software company.

Let’s go back to the second sentence in the last point. How are the big NFT marketplaces going to know what exactly the royalty structure is that they are supposed to respect?

Here comes the shocking news — there is no one single standard. In fact, I would guess that by now there are at least a dozen. I will list the ones I know of:

• OpenSea: you can create an account on the site, log in, and set the royalty that you expect to receive on the resale of NFTs from your specific collection, or
• OpenSea (again): you can get your NFT smart contract developer to include a contractURI() function in your collection contract that points to a metadata file, which specifies what the expected royalty payment should be on resales of the NFTs in the contract, or
• Mintable, which respects EIP-2981, an Ethereum standard that requires your NFT smart contract developer to include something known as an IERC (Interface for an Ethereum Request for Comment, I guess, but good luck finding a definition on the web) for the standard in your NFT contract, and a function called royaltyInfo() that when given a token Id and a price, returns the address the royalty should be paid to, and the amount that should be paid. Note the “should” used twice in the previous sentence. There is nothing that compels anyone to actually pay a blind bit of attention to that function, or
• Rarible v1: get your developer to include a function called getRoyalties() in your NFT contract that returns a data structure, which informs Rarible what the royalty that should be paid is, and to whom it should be paid, or
• Rarible v2: as for v1 above, but it’s called the LibRoyaltiesV2.sol library instead, and expects a function called getRaribleV2Royalties(), or
• LooksRare: authenticate on their site with the NFT contract deployer address, and set up a collection profile, which includes the opportunity to configure the royalty rate expected for a resale (the Bored Apes Yacht Club contract owner did this back in January)

I’m going to stop here, because I have covered four NFT marketplaces, six different royalty standards, using three different mechanisms, and all of them rely on the individual platforms on which the sale takes place to respect them.

Oh, and they only respect the standards that they have adopted, so if you want to ensure that the NFT that you have created accrues royalties from sales on all of these marketplaces, then you need to make sure that you have implemented all the different standards.

Yeah, take a moment to think about that. It is going to take you longer to achieve “full royalty coverage” than it probably did for you to create your artwork in the first place.

A summary of sorts

Do I sound cynical? Yes. Because I am.

Why do these platforms all use different methods for royalty payments? I suspect it is because they want you to stay on their platform. It is unlikely that you are going to implement every single royalty payment system in your contract, and that ensures you will encourage buyers to gravitate to your platform of choice. It’s the Facebook (sorry, Meta) strategy — it doesn’t matter how much the users hate the social media company — if all their friends are there too, then they’ll keep hanging out there.

But back to blockchain. In the space of less than five years, the NFT niche of the blockchain world has managed to create a fragmented and diverse bureaucratic system that rivals the complexity of the traditional CMOs.

Who, if you remember, have taken 170 years to achieve their particular fragmented and incomprehensible bureaucratic system.

I want to believe that one day there will be something out there that will automatically, efficiently, irrefutably, and honestly reward our dreamers. The artists, writers, inventors, composers, script writers, comedians, and all the other members of the community of creators who enrich our lives with their ability to fabricate and then lock down in tangible form these incredible works of imagination.

I am sad to say that NFTs are not that something.