💰 Course 13: Royalties System PREMIUM

A royalty is a payment made to a creator, inventor, or rights holder each time their work is used, sold, or generates revenue. Royalties are the cornerstone of the creative economy — they ensure that creators continue to earn from their work long after the initial creation.

Think of it this way: when a songwriter writes a hit song, they don’t just get paid once. Every time that song plays on the radio, streams on Spotify, or is used in a commercial, a small royalty payment is triggered. This creates an ongoing income stream tied directly to the value of their creation.

Traditional Royalty Categories

The Problems with Traditional Royalties

While the concept of royalties is straightforward, the traditional system is plagued by inefficiencies:

Blockchain technology fundamentally transforms the royalty landscape by making payments automatic, transparent, instant, and permanent. Instead of relying on intermediaries to track usage and distribute payments, smart contracts handle everything programmatically.

The Blockchain Royalty Advantage

When a digital asset with royalty logic is sold on a blockchain, the royalty payment happens in the same transaction as the sale. There is no delay, no intermediary, and no way to “forget” to pay the creator. The rules are encoded in immutable smart contract code.

Key Properties of On-Chain Royalties

• Perpetual

  Unlike traditional contracts that expire, on-chain royalties last forever. As long as the blockchain exists, the royalty logic executes. A creator who mints an asset today could receive royalties from resales occurring decades in the future.

• Transparent

  Every royalty payment is recorded on a public blockchain. Creators can independently verify every transaction, see exactly how much was paid, when, and by whom. No more “trust us” accounting from labels and publishers.

• Instant Settlement

  Royalties are paid in the same transaction as the sale. No 30-day net terms, no quarterly statements, no waiting. The creator’s wallet balance increases the moment the sale completes.

• Programmable

  Royalty splits can be as complex as needed: 5% to the original artist, 2% to the producer, 1% to the charity, 2% burned. All executed automatically without human intervention.

• Global by Default

  A creator in Nigeria receives royalties from a buyer in Japan just as easily as from a buyer next door. No cross-border complications, no currency conversion fees, no correspondent banking delays.

Traditional vs. Blockchain Royalties

EIP-2981 (Ethereum Improvement Proposal 2981) is the standardized way to communicate royalty payment information for NFTs on Ethereum and EVM-compatible blockchains. It was finalized in September 2022 and has become the industry standard.

How EIP-2981 Works

EIP-2981 defines a single function that any NFT contract can implement: royaltyInfo(). When a marketplace wants to know how much royalty to pay and to whom, it calls this function with the token ID and sale price. The contract returns the royalty recipient address and the royalty amount.

Implementation Example

Here is a simplified implementation showing how a creator sets a 7.5% royalty on all their NFTs:

Basis Points Explained

Royalties are typically expressed in basis points (bps) rather than percentages to avoid floating-point arithmetic issues in smart contracts. One basis point equals 0.01%, so:

The emergence of NFT royalties has fundamentally changed the relationship between creators and their work. For the first time in history, artists can earn perpetual income from secondary sales — something never possible in the traditional art world.

The Traditional Art Problem

Consider this scenario: In 2004, an emerging artist sells a painting for $5,000. Over the next 20 years, as the artist becomes famous, that painting changes hands multiple times, eventually selling at auction for $2 million. The artist receives nothing from any of those secondary sales. Only the first $5,000.

With NFT royalties, that same artist could encode a 10% royalty into the token. They would receive $200,000 from that $2 million sale — and every future sale after that.

Music Industry: Traditional vs. Blockchain Royalties

Secondary Market Royalty Mechanics

Understanding how secondary market royalties work is essential. Here is the step-by-step flow:

• Creator Mints the NFT

  The creator deploys a smart contract with royalty logic built in (e.g., 10% royalty). They mint the NFT and list it for primary sale.

• First Sale (Primary Market)

  Buyer A purchases the NFT for 1 ETH. The creator receives the full 1 ETH (minus any marketplace fee). No royalty on primary sale.

• Buyer A Resells (Secondary Market)

  Buyer A lists the NFT and Buyer B purchases it for 5 ETH. The marketplace queries royaltyInfo(). The creator receives 0.5 ETH (10%), and Buyer A receives 4.5 ETH.

• Ongoing Resales

  Every subsequent resale triggers the same 10% royalty. If Buyer B sells for 20 ETH, the creator receives 2 ETH. This continues perpetually.

Kenostod’s Residual Value Token (RVT) system takes blockchain royalties to the next level. Unlike simple NFT royalties that trigger on resale, RVTs generate royalties based on ongoing usage of computational results. This means you earn every time an enterprise uses the work you contributed to — not just when someone buys or sells a token.

How the RVT Royalty System Works

Distribution Formula

Every time an enterprise uses a computational result tied to an RVT, a micro-payment is triggered and distributed as follows:

RVT Tier Multipliers

Not all RVTs earn equally. Higher-tier RVTs represent more valuable contributions and receive proportionally larger royalty shares:

What Makes RVT Royalties Unique

The Kenostod RVT model differs from typical NFT royalties in several important ways:

Understanding how royalties are implemented in smart contract code gives you deeper insight into how these systems actually work. Let’s examine several implementation patterns used across the blockchain ecosystem.

Pattern 1: Simple Percentage Royalty

The most basic implementation — a fixed percentage applied to every sale:

Pattern 2: Multi-Recipient Split

More complex royalties that distribute to multiple recipients:

Pattern 3: Kenostod RVT Royalty Logic

A simplified version of the Kenostod royalty distribution pattern, showing how usage-based royalties work:

One of the most contentious issues in the NFT space is royalty enforcement. While the technology exists to define royalties, ensuring they are actually paid is a different challenge entirely.

The Marketplace Bypassing Problem

Because EIP-2981 is advisory (it tells marketplaces what royalties to pay, but doesn’t force them), some marketplaces have chosen to make royalty payments optional or eliminate them entirely to attract traders with lower fees.

How Bypassing Works

When a marketplace facilitates a sale, it can simply choose not to call royaltyInfo() or ignore the returned values. The NFT transfer still succeeds because the royalty logic is separate from the token transfer logic. Additionally, users can perform “wrapper” trades — wrapping an NFT in a new contract and trading the wrapper, completely bypassing the original royalty.

Timeline of the Royalty Wars

The debate over royalty enforcement has been one of the most heated in the NFT space:

• 2021: The Golden Age

  OpenSea, the dominant marketplace, enforced creator royalties on all sales. Creators earned billions in royalties. The ecosystem appeared healthy.

• 2022: Zero-Royalty Marketplaces Emerge

  Platforms like SudoSwap, X2Y2, and LooksRare began offering optional or zero-royalty trading, undercutting OpenSea on fees. Traders flocked to lower-cost alternatives.

• 2023: OpenSea Responds

  OpenSea introduced the Operator Filter Registry, a blocklist that NFT creators could use to block sales on marketplaces that don’t honor royalties. This was controversial but partially effective.

• 2024+: New Solutions

  The industry is moving toward enforceable royalties through token-level enforcement, where the transfer function itself checks if royalties were paid. ERC-721C and similar standards embed royalty enforcement directly into the token.

Enforcement Solutions

Legal Framework for Digital Royalties

The legal landscape around digital and blockchain royalties is still evolving. Key considerations include:

Royalties represent one of the most powerful forms of token rewards in the digital age. Once the initial work is done (creating an asset, contributing computation, building an audience), the income flows automatically with zero additional effort.

What Makes Royalties “Passive”

True token rewards means earning money without active, ongoing labor. Royalties qualify because:

• The work is done once (creation, contribution, minting)
• Payments are automatic (smart contract handles distribution)
• Income is perpetual (continues as long as usage/trading occurs)
• No management required (no invoicing, chasing payments, or accounting)

Royalty Stacking

Royalty stacking is the strategy of accumulating multiple royalty-generating assets to create diversified, compounding income streams. In Kenostod, this means earning RVTs across different industries, task types, and tier levels.

Example: Building a Royalty Stack

Compound Growth Strategy

The most powerful aspect of royalty income is the ability to reinvest earnings to acquire more royalty-generating assets. This creates a compound growth effect:

• Month 1: Initial Earnings

  You hold 3 RVTs generating $200/month total. You reinvest those earnings to acquire more computing power for tasks.

• Month 3: Growing Stack

  Your reinvestment has earned you 2 more RVTs. You now earn $350/month from 5 assets. The additional income accelerates further acquisition.

• Month 6: Momentum Builds

  Your stack has grown to 8 RVTs across multiple industries. Monthly income reaches $600. The compound effect becomes increasingly powerful.

• Month 12: Significant Income

  With 15+ RVTs and a diversified portfolio, your monthly token rewards could exceed $1,500. And you’re still earning new RVTs.

Optimization Strategies

These real-world examples illustrate the transformative power of blockchain royalties and the challenges the industry has faced:

Complete these exercises to reinforce your understanding. Take your time — thoughtful answers demonstrate true comprehension.