Arthur Breitman Suggests Solution to Problem of NFT Royalties Not Being Honored

Could 'taint tracking' and Harberger fees be the answer?


650 words, 4 minute read

For creators, one of the most appealing aspects to NFTs is the ability to attach royalty agreements to sales, ensuring that the artist benefits from a portion of future sales. That’s a huge incentive for digital creators, allowing them to earn incremental income in perpetuity. In an ideal world, for an artist whose work continues to increase in value, royalties from subsequent sales could support them indefinitely.

The appeal for creators is obvious, but the reality is that NFT creator royalty agreements are complicated. Far from being binding, such agreements are essentially just a matter of convention. An unscrupulous exchange might decide not to honor them, and there would be nothing to stop it.

Arthur Breitman, co-founder and early architect of Tezos, has published a video in which he proposes a solution to this problem in the form of ‘taint tracking’, which uses social pressure to incentivize ethical behavior in the chain of NFT ownership:

You can look at the history of an NFT on the blockchain. You can see where it’s been. And if it’s [been] traded through marketplaces that don’t honor royalties, or if it’s been part of some dubious trades, the creator can decide to invalidate it. […] You just have a bit that says is it legitimate, or not? And you just set the bit as ‘not legitimate’.

[…] Some people might still want to buy that [NFT], but a lot of people care about legitimacy. A lot of people do not want to buy an NFT that has been tainted in this way.

Another possible solution, with Breitman warns is ‘very unpopular’, is known as a Harberger fee. Here, the owner of an asset sets the price at which they’re willing to sell it, and agrees to pay an ongoing royalty to the creator, totaling X% of that price:

Once we do that, we have something that actually captures time multiplied by value. If somehow you try to cheat the system and set too low of a reserve, someone will buy it from you. Maybe even the artist will come and buy it from you. […] But on the other hand, you also don’t want to set the value to be too high, because it will cost you a lot in royalties.

The Harberger approach tends to be unpopular for a few reasons, not least that in Breitman’s words, ‘it feels like renting’. But:

Fundamentally, you’re never going to have really good, smart contract enforcement of something like a transaction fee for royalties. It’s socially enforced. But they are social means of enforcing it, even if some exchanges are non-compliant, by doing taint tracking. There are also alternatives, like Harbinger fees, that I’d love to see tried.

Fundamentally, for me, the most interesting lesson in all this is, when reality is fighting against you, when you see edge cases pop up and you try to patch them, it’s telling you something. It’s telling you something important. It means you’ve missed something.

Given that NFTs only now entering the the mainstream, and the market for digital assets is barely in its infancy, the conversation about ensuring a fair deal for creators and collectors is only getting started. Whenever large sums of money are concerned, bad actors will always seek to exploit a marketplace to their benefit, but with NFTs finally offering the promise of a truly equitable economy for digital creators, expect to see a lot more debate - and a lot more social pressure - around this issue in the coming months and years.

To see more of Arthur Breitman’s video talks, check out his YouTube channel.