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SACRÉ BLEU: Self-Assessed Creator Royalties Énforced by Balancing Liquidity Estimation & Utility (A formal definition and analysis of Ethereum Request for Comment ERC-7526)

David Huber, Arran Schlosberg

Abstract

The secondary market for Ethereum non-fungible tokens (NFTs) has resulted in over $1.8bn being paid to creators in the form of a sales tax commonly called creator royalties. This was despite royalty payments being enforced by no more than social contract alone. Predictably, such an incentive structure led to zero-royalty alternatives becoming abundant and payments dwindled. A purely programmatic solution to royalty enforcement is hampered by the prevailing NFT standard, ERC-721, which is ignorant of sale values and royalty enforcement therefore relies on (potentially dishonest) third parties. We thus introduce an incentive-compatible mechanism for which there is a single rationalisable solution, in which royalties are paid in full, while maintaining full ERC-721 compatibility. The mechanism constitutes the core of ERC-7526.

SACRÉ BLEU: Self-Assessed Creator Royalties Énforced by Balancing Liquidity Estimation & Utility (A formal definition and analysis of Ethereum Request for Comment ERC-7526)

Abstract

The secondary market for Ethereum non-fungible tokens (NFTs) has resulted in over $1.8bn being paid to creators in the form of a sales tax commonly called creator royalties. This was despite royalty payments being enforced by no more than social contract alone. Predictably, such an incentive structure led to zero-royalty alternatives becoming abundant and payments dwindled. A purely programmatic solution to royalty enforcement is hampered by the prevailing NFT standard, ERC-721, which is ignorant of sale values and royalty enforcement therefore relies on (potentially dishonest) third parties. We thus introduce an incentive-compatible mechanism for which there is a single rationalisable solution, in which royalties are paid in full, while maintaining full ERC-721 compatibility. The mechanism constitutes the core of ERC-7526.
Paper Structure (21 sections, 11 theorems, 16 equations, 1 figure)

This paper contains 21 sections, 11 theorems, 16 equations, 1 figure.

Table of Contents

  1. Introduction
  2. Background
  3. Related Work
  4. ERC-2981
  5. Royalty Registry
  6. Operator filters
  7. ERC-4910
  8. Problem
  9. Definitions
  10. Desiderata
  11. Mechanism
  12. Rules
  13. Analysis
  14. Discussion
  15. Implementation, adoption, and user experience
  16. ...and 6 more sections

Key Result

Lemma 1

Invoking rul:takeback to reclaim ownership of a token is the best response for player $\mathsf{O}$ if player $\mathsf{P} \neq \mathsf{O}$ chooses not to pay any fee in rul:first.

Figures (1)

  • Figure 1: Flowchart representation of \ref{['thm:incentive-compat']}. Under best responses, after a token is transferred between addresses, the player controlling the receiving address pays a royalty fee iff it wasn't a self-transfer. The royalty is computed on the player's truthfully revealed estimate of fair-market value. Lines with arrows depict hypothetical moves while those without them constitute passive flow due to branching scenarios or automatic consequences. Solid lines represent best responses from their originating state and bold ones follow the path of best responses to a rationalisable solution. Moves are annotated with the player ($\mathsf{O}$ or $\mathsf{P}$) and their best possible outcome, having commited to the move, but from then on following a best-response strategy.

Theorems & Definitions (37)

  • Definition 1: Pseudonyms
  • Definition 2: Ownership
  • Definition 3: Transfer
  • Definition 4: Cost
  • Definition 5: Revelation
  • Definition 6: Fee function
  • Definition 7: Historical non-fee-paying owners
  • Definition 8: Auto-sale price
  • Definition 9: Valuation
  • Remark 1
  • ...and 27 more