Forward Protocol: Finding the best solution in the NFT royalty dispute

Written by: LeftOfCenter

NFT royalties were once seen as the original narrative and top use case of the NFT industry, and the driving force behind artists adopting this new medium to release works. For artists, royalties mean that they can get a certain percentage of the proceeds for every second-hand transfer of NFTs. This continuous income stream is crucial for artists, as it means they can make a living and pay for the daily expenses of continuing to maintain projects and communities.

The other side of the coin is that the existence of royalties will hinder the expansion of NFT liquidity. There is a voice that believes that NFT royalties should be abolished to reduce the friction costs of market makers, the backbone of the entire industry's liquidity, promote price discovery, reduce the risk of buyers' exit, and improve the current low capital efficiency of the NFT market as a whole, and increase the overall scale of the market.

One case of market growth due to the abolition of copyright fees is Sudoswap. As the first decentralized NFT automated market-making platform, the elimination of copyright fees reduces the cost of market making, which will inevitably attract a large number of market makers and even project parties themselves to build liquidity pools on it to meet the players' immediate selling needs. In addition, due to the lack of copyright fees, this place once became the best place for collectors to pick up the same NFT at the lowest price, especially those with high net worth NFTs. Sudoswap meets the needs of both buyers and sellers, greatly improving the liquidity of NFT assets, and the trading volume has surged.

The current situation is that since copyright fees cannot be enforced at the code level, whether artists set copyright fees or what percentage of copyright fees they set does not play a decisive role in the final execution of copyright taxes. What plays a decisive role are the rules issued by the secondary markets.

In order to grab a larger market share and users, these NFT markets have launched policies that are in line with the buyer's market: in addition to the largest NFT market OpenSea, which uniformly charges a 2.5% copyright fee, X2Y2 has launched a "copyright fee self-selection function" that allows NFT buyers to choose to pay 100%, 50%, and 0% copyright fees; LooksRare has cancelled creator royalties and replaced them with 25% of the market agreement fee or 0.5% of sales, and the NFT market Magic Eden on Solana has also turned to a royalty-free market. On all these platforms, NFT copyright payments are optional (non-mandatory), which means that for buyers, they have the power to choose whether to pay copyright fees.

As another stakeholder in the NFT market, the artist community has responded differently. Artist Tyler Hobbs has shielded his project QQL from secondary markets that do not enforce royalties at the smart contract level. Other artists have begun to explore other revenue models besides royalties, such as raising the price of minting, encouraging fans to donate, increasing supply, charging additional utility fees, and seeking other alternative sources of income, such as issuing peripherals and holding events.

On November 6, OpenSea announced that it would launch a tool for enforcing copyright fees on the chain. Creators can add a piece of code provided by the tool to newly created or existing upgradeable NFT contracts. Once this code is added, it means that the NFT will automatically block secondary markets that do not enforce royalties. There is no doubt that unlike other NFT markets that face the buyer's market, OpenSea stands on the seller's market, that is, it launches a tool for creators to control their own business model and puts the choice in the hands of the creators themselves. Although this is a mandatory on-chain copyright enforcement tool, the royalty enforcement will only take effect if the creator chooses to deploy it, that is, buyers who have not deployed the on-chain royalty enforcement tool will not be affected. OpenSea believes that whether to levy royalties should be chosen by the creators themselves, rather than the various secondary markets making decisions for them.

Just today, Sudoswap, which once pioneered 0% royalties, unexpectedly announced that it has deployed a router contract that supports royalty payments. The Reservoir protocol has been integrated, and more details about the full on-chain royalty execution will be shared in the next few weeks. It also emphasized that these features apply to all collections without any whitelist or blacklist restrictions.

In the NFT royalty dispute, are there really only two options: standing on the buyer's side or the seller's side? How should the contradiction between the liquidity of the NFT market and the copyright fee be weighed? How to look at the value and interest balance of the two important forces that are indispensable in the ecosystem - creators and LPs - from a holistic perspective? In addition to zero royalties, optional royalties and mandatory royalties, are there other solutions to the royalty dispute? Today, the NFT liquidity protocol Forward proposed another solution, which promotes LP market-making without abolishing copyright fees, thereby allowing more transactions and liquidity to occur. In addition, BlockRhythm had the honor of chatting with Peter Watts, the founder of the Forward protocol, and further discussed the arguments, technical solutions and other details of the Forward protocol.

What is Forward?

Forward is an NFT liquidity solution that attempts to incentivize LP market making from the protocol level without abolishing copyright fees.

Its basic principle is: decouple and split the rights granted by NFT through the protocol, only charge copyright fees to real collectors, and market makers who provide liquidity do not need to pay, thereby retaining creator royalties without sacrificing copyright payment, incentivizing market making, solving the current problems of insufficient liquidity and price discovery difficulties in the NFT market, and ultimately providing collectors with an NFT vending machine-style user experience.

Forward's argument is that NFT royalties are important, but not every transaction should pay royalties. NFT rights should be given to those who care about them, and accordingly, the rights owners should pay the royalty costs. LPs who don't care about the relevant rights do not need to pay copyright fees, and of course they do not enjoy the relevant rights.

Opensea recently launched an NFT copyright on-chain enforcement plan to provide more options for the artist community. Forward is looking for a solution for LP, another crucial group in the market, that is, to reduce the friction cost of liquidity market making by removing the market making cost - copyright fee.

Conflict between copyright fee and market maker

The biggest problem facing the NFT market at present is insufficient liquidity, which will lead to excessive volatility of NFT prices and collectors' inability to exit immediately at a fair price, which will eventually make the entire NFT market sluggish.

Market makers refer to entities that provide liquidity to the NFT market. They are composed of market makers, traders, AMMs, etc. They exchange profits through frequent transactions and become an indispensable force in the NFT liquidity market.

However, the existence of NFT copyright fees will bring friction costs and hinder market liquidity. The existence of NFT copyright fees is equivalent to transaction taxes, which means that every transaction and transfer of NFTs requires the payment of copyright fees. For market makers, traders, AMMs and other participants, it will reduce their enthusiasm for participating in market making, increase market making costs, and reduce overall market liquidity.

Removing copyright fees reduces market-making costs, which can enhance the enthusiasm of market makers, encourage a large number of resale operations and liquidity market making, and improve the liquidity of the overall market.

Technical Solutions

The main idea of the Forward protocol design is to split the "tradability" of tokens and the "rights" granted. For short-term liquidity providers (AMMs, flippers, and professional LPs), NFTs hosted on the protocol are limited to partial list permissions. The corresponding benefit is that resale transactions do not require copyright fees, which can greatly encourage market making, promote price discovery, and improve market liquidity. Founder Peter Watts said that only collectors who are truly interested in tokens will eventually exchange NFTs into their wallets to have corresponding rights/benefits and accessible permissions, which is undoubtedly something that only real community members care about.

The Forward protocol is based on the NFT liquidity protocol Reservoir, and adopts the EIP-1271 standard, supports signature-based order book bidding, and can distribute public order books to multiple NFT mainstream markets through the Reservoir protocol.

On the technical level, the operating principle of the Forward protocol is:

1. Market makers create bid orders through the Forward protocol, and these bid orders will be distributed to all current mainstream NFT secondary markets.

2. Once someone accepts the order, the transaction will take effect. At this time, the NFT is still locked in the Forward protocol, but the ownership is transferred to the market maker. However, the market maker does not fully enjoy its rights, that is, all the utilities represented by the NFT cannot be accessed, but only has the right to sell, and can relist the token to the currently supported mainstream NFT market for resale (such as OpenSea)

3. Once the resale is successful, the next owner will move the withdrawal to his own wallet, and all the rights granted by the token will be unlocked, such as token authorization, or conditional airdrops.

4. When moved to the wallet, the Forward protocol will trigger the verification of royalty payments, that is, royalties must be paid to unlock all use cases and functions.

Currently, Forward has not been officially launched, only the V1 Beta version is online, and only supports direct program interaction (Goerli contract), and a graphical user interface will be launched in the next version. V1 version supports: Creation and execution of Forward bid orders, and supports distributing list orders on Forward to OpenSea or Reservoir's order book through seaport. The upcoming V2 version supports: creating Forward list orders directly from the wallet or Forward, market making front-end interface, creator exit, Forward internal transactions, trading order lists through Reservoir, redemption to wallet, and payment with royalties.

Royalties have become the hottest and most controversial topic in the NFT industry, and with it comes the race to the bottom among various NFT markets to grab market share and users. Fortunately, with the continued game of interests among collectors, creators, and liquidity providers, we have seen the emergence of applications and solutions that are not only for a single interest party, which will inevitably bring more options to the market and will inevitably give rise to more applications around NFT copyright fees. In this copyright fee game, perhaps what needs to be considered is to find the best balance point where all parties can coexist.

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