ERC-2981 NFT Royalty Standard Explained

ERC-2981: The NFT Royalty Standard Explained

Definition: ERC-2981 is a technical standard for Non-Fungible Tokens (NFTs) that specifies how creators receive royalties when their NFTs are resold. Think of it as a pre-agreed contract embedded within an NFT, ensuring the creator gets a cut of future sales, much like an artist receiving royalties for each sale of their artwork.

Key Takeaway: ERC-2981 provides a standardized method for NFT creators to receive royalties on secondary market sales, fostering a more sustainable ecosystem for digital art and collectibles.

Mechanics: How ERC-2981 Works

At its core, ERC-2981 defines a standardized function within an NFT smart contract. This function, royaltyInfo(), allows marketplaces and other platforms to query the NFT contract to determine the appropriate royalty recipient and the royalty percentage. This function is crucial, as it provides a consistent way for different platforms to understand and implement royalty payments.

The royaltyInfo() function typically returns two key pieces of information:

• Recipient Address: The Ethereum address of the person or entity entitled to receive the royalty payment (usually the NFT creator).
• Royalty Amount: The percentage or fixed amount of the sale price that the recipient will receive. This is often expressed as a percentage, but can also be a flat fee.

Core Function: function royaltyInfo(uint256 _tokenId, uint256 _salePrice) external view returns (address receiver, uint256 royaltyAmount);

This function is the heart of ERC-2981. When a marketplace facilitates a sale, it calls this function on the NFT's smart contract, providing the token ID and the sale price. The function then calculates the royalty amount and identifies the recipient.

The implementation of ERC-2981 requires the NFT contract to inherit from an interface that defines the royaltyInfo() function. This ensures that the contract provides the necessary information for royalty payments. Popular libraries, like OpenZeppelin, offer pre-built contracts that simplify the process of implementing ERC-2981.

For example, if an NFT sells for 1 ETH, and the royalty is set at 10%, the royaltyInfo() function would return the creator's address and 0.1 ETH. The marketplace then sends 0.1 ETH to the creator's address as part of the transaction.

Step-by-Step Breakdown:

1. NFT Creation: The creator deploys an NFT contract, incorporating the ERC-2981 standard.
2. Listing: The NFT is listed for sale on a marketplace.
3. Sale Initiation: A buyer purchases the NFT.
4. Royalty Query: The marketplace calls the royaltyInfo() function on the NFT's contract, providing the token ID and sale price.
5. Royalty Calculation: The function calculates the royalty amount and identifies the recipient.
6. Payment Execution: The marketplace automatically sends the royalty payment to the creator (or specified recipient) as part of the transaction.

Trading Relevance: Price, Market Dynamics, and ERC-2981

ERC-2981, while not directly influencing the price of an NFT, plays a crucial role in shaping market dynamics and creator incentives. It ensures creators benefit from the secondary market success of their NFTs, which can, in turn, influence:

• Creator Incentives: Knowing they'll receive royalties encourages creators to produce higher-quality art and collectibles, thus potentially increasing the value and desirability of their NFTs. This increased demand can, over time, positively affect prices.
• Marketplace Adoption: Marketplaces that support ERC-2981 attract more creators and collectors, promoting a healthier trading environment. This can lead to increased trading volume and potentially higher prices for NFTs listed on these platforms.
• Investor Confidence: The assurance of royalty payments can increase investor confidence, as it aligns the interests of creators and investors. This shared benefit can lead to increased investment, driving up the potential value of the assets.

The absence of royalties, or the lack of standardization before ERC-2981, made it difficult for creators to benefit from the long-term success of their work. This could discourage creators, leading to a decline in the overall quality and innovation of the NFT space. The implementation of ERC-2981 addresses this by providing a reliable royalty mechanism, which can positively impact the market's long-term sustainability.

Risks and Considerations

While ERC-2981 is a significant step forward, several risks and considerations remain:

• Marketplace Compliance: Not all NFT marketplaces currently support ERC-2981. This means that if an NFT is sold on a non-compliant marketplace, the creator may not receive royalties. Thorough research is essential when choosing a marketplace.
• Contract Implementation Errors: Errors in the implementation of the ERC-2981 standard within an NFT contract can lead to incorrect royalty calculations or payments. Always review the smart contract code or seek expert advice before investing.
• Gas Fees: Royalty payments are executed on-chain, and thus subject to gas fees. This can be a factor, particularly during periods of high network congestion, which can impact the profitability of royalty payments, especially for low-value NFTs.
• Lack of Enforcement: While ERC-2981 provides a standard, there is no centralized enforcement mechanism. Marketplaces are responsible for implementing the standard correctly. Non-compliant marketplaces may not correctly pay royalties, which can lead to disputes and legal issues.
• Evolving Standards: The NFT space is rapidly evolving. Although ERC-2981 is a widely adopted standard, newer or improved standards could emerge, potentially making existing contracts obsolete or requiring updates.

History and Real-World Examples

ERC-2981 was proposed and adopted to address the lack of standardization in NFT royalty payments. Before ERC-2981, royalty implementations were often proprietary and inconsistent across different platforms. This fragmentation made it difficult for creators to ensure consistent royalty payments. The introduction of ERC-2981 provided a universal standard, simplifying the process and improving the overall experience for creators and collectors.

Examples of ERC-2981 in action:

• OpenSea: One of the largest NFT marketplaces, OpenSea, has fully integrated ERC-2981, allowing creators to define and receive royalties on their NFTs sold on the platform.
• Rarible: Rarible, another popular marketplace, also supports ERC-2981, providing creators with a simple way to set royalty percentages and receive payments on secondary sales.
• Foundation: Foundation, known for its curated digital art, utilizes ERC-2981 to ensure artists receive royalties on all secondary market sales.

These examples demonstrate the widespread adoption of ERC-2981, making it a cornerstone for a fair and sustainable NFT ecosystem. The standardization provided by ERC-2981 has significantly improved the efficiency and reliability of royalty payments, supporting the growth of the digital art market.