Rethinking Secondary Royalties for Onchain Ebooks

In the early 2000s, the introduction of ebooks broke the publishing industry.

For one golden moment, as production, transportation, warehousing, and distribution costs fell away, the book world seemed poised for a literary utopia that paired lower book prices with higher author royalties for the benefit of all.

That dream ended when traditional publishers rewrote contracts to limit author rights, while online marketplaces replaced traditional book purchases with ebook licensing agreements, restricting access to digital content on terms that offered readers fewer rights and no actual ownership of their digital book collections.

Industry consolidation subsequently granted ebook publishers and online distributors ever more power to squeeze ever more rights and profits from authors and their readers until we arrived at the current point of crisis.

In the early 2020s, emerging blockchain-based technologies offered a glimmer of hope for the book community to fix the publishing industry's compounding problems.

Because of challenges unique to the collection and display of onchain ebooks, their development has lagged behind major deployments of other onchain digital media, and has been especially overshadowed by the boom and bust cycles for onchain visual art, but the prospects for a blockchain-powered literary revolution have never been brighter.

Today, we find ourselves at the cusp of another golden moment of opportunity for another possible utopia, this one heralding innovative formats, onchain authentication to battle piracy, decentralized storage to beat back the rising tide of censorship, tokens to restore ebook ownership rights to readers, decentralized social networks to democratize book recommendation algorithms, and smart contracts to ensure that author royalties are reported instantly, paid automatically, and handled transparently.

We are early. So early that we have no consensus yet on what to even call this emergent category of blockchain-enabled, token-mediated, decentralized, web3-native books. But having experienced the suboptimal rollout of first-generation ebooks, those of us with an interest in advancing reader and author rights know that we must be more vigilant if we're going to save the publishing industry from its own worst impulses.

So far, in the short history of onchain ebooks, the biggest fight to keep author rights from being chipped away has been the battle over secondary royalties. This is where the battle lines are drawn.

For many authors, the crown jewel of onchain ebooks was the promise of a new revenue stream: royalties on secondary sales.

Making onchain ebooks ownable restores a right that was stripped away from readers in the initial transition from physical books: the right to resell a book after it's been read. A major feature of the onchain used book market will be that every used book will retain its like-new condition. These books won't ever collect dogeared pages, rips and tears, coffee stains, margin notes, or damage from water, fire, insects, mildew, mold, or time.

Since an onchain ebook's first owner derives no greater value that the second, third, or fourth owner, and since used ebooks will be competitive substitutes for new ebooks, a secondary royalty on ownership transfers will be necessary to ensure that authors benefit from each new reader and that each new reader fairly compensates their favorite authors.

In order to allow owners to reshelve their book tokens from one wallet to another without having to pay a royalty for intrapersonal transfers, and to promote the future development of lending and library protocols, the secondary royalty system was initially designed to operate on an honor system, relying on compliant marketplaces for enforcement.

But when competition heated up between marketplaces, some unscrupulous marketeers decided that the best way to attract customers would be by allowing them to stiff creators of their secondary royalties, enabling royalty theft on a massive scale to subsidize seemingly lower prices.

In the traditional book world, publishers and distributors have always been incentivized to minimize author royalties collected and transmitted, but they have been constrained in this effort by contracts, industry practice, and business regulations. In a less regulated space, onchain marketplaces in competition with each other are naturally incentivized to bring royalties to zero or to treat creator compensation as if it were a mere request or optional gratuity.

As royalty-optional and royalty-free marketplaces rolled out in 2022, creator business models became less viabile, expected returns ratcheted downward, and the entire space lost much of its vibrancy and creative energy. Soon afterward, the entire onchain market collapsed, platforms discontinued service, creators abandoned the space, and further development momentum stalled.

That the onset of mass royalty theft correlated with the start of the bear market doesn't prove causation, but when speculators are allowed free reign to harm hardworking creators, market corrections are the least of our problems.

A recent article by Michael Blau, Scott Duke Kominers, and Daren Matsuoka for a16zcrypto examines four ways to salvage secondary royalties through automatic enforcement mechanisms. The two most widespread so far have been blocklists and allowlists, while the authors present further refinements available in staked allowlists and right of reclaim.

• Blocklists: A book collection's smart contract can be programmed to block transfers from happening through marketplaces identified as non-compliant. This is a reactive solution that requires constant maintenance and updating of a non-compliant market list, as bad actors may spin up multiple new marketplaces to circumvent the blocks. Another potential downside to blocklists is that any centralized entity tasked with maintaining the list might itself exhibit corrupt impulses.

• Allowlists: A book collection's smart contract can be programmed to allow transfers only within pre-approved marketplaces that are known to fully comply with secondary royalties. This list would be easier to maintain, and would be more effective at blocking non-compliant transactions, but would create barriers to the establishment of new compliant marketplaces and might stifle marketplace innovations that would otherwise benefit readers and creators. The allowlist process may also be overly restrictive in its implementation, and might still allow bad actors to circumvent royalty payments.

• Staked Allowlists: This mechanism is a refinement on allowlists would allow new marketplaces to add themselves to an allowlist by putting up a stake, such as a deposit of money, that would become forfeit if the marketplace were to subsequently fail to collect and distribute secondary royalties. Although a potential solution to many issues of current allowlists, the staked allowlist would require complex planning and execution to ensure that its terms remain fair and useful.

• Right of Reclaim: This mechanism is a refinement on the concept of digital ownership itself, introducing the concepts of asset owners, title owners, and a title transfer fee that could be used in place of a secondary royalty. The current holder of the ebook, its asset owner, would enjoy all the traditional benefits of onchain ebook ownership, which might include access to the contents, discounts on and early access to subsequent ebooks, a gated social space, or gated admission to author events. But the most recent payer of the ebook's title transfer fee, its title owner, would retain the ability to reclaim the ebook at any time. A risk of reclaim would exist whenever the asset owner and title owner are different entities, and would persist until the asset owner pays the title transfer fee and becomes the title owner.

I am particularly excited about the right of reclaim. Buying an ebook with a transfer fee would be little different from buying a book with a secondary royalty. In the model presented, compliant marketplaces might wrap the transfer fee and ebook together into a single transaction, requiring would-be sellers to purchase the transfer fee before listing.

Alternatively, marketplaces might include special indicators to identify ebooks listed for sale by asset holders who don't hold the title, so that fully informed buyers could choose whether or not to step into their shoes. If you bought the ebook without paying the title transfer fee, your ownership would be tentative and subject to reclaim, a risk that could be eliminated by paying the fee afterward.

Right of reclaim wouldn't prevent royalty non-compliant sales, but it would disincentivize them as a calculated risk without the need for anyone to maintain a list of compliant or non-compliant marketplaces. This risk might even drive buyers away from the non-compliant markets entirely, and encourage all marketplaces to play by the rules.

Right of reclaim would allow friends to exchange ebooks and each retain the right to grab their ebooks back later, even from a friend who moves away and falls out of touch. At the end of a relationship, right of reclaim would make it possible for each person to separate their stuff with fewer awkward arguments. At the same time, owners would always be able to transfer their ebooks from one owned wallet to another without paying the transfer fee because there would be no danger of reclaiming the ebooks from themselves.

I can even imagine a lending library where patrons use right of reclaim to "test drive" an ebook. If they decide to keep it, they can pay the transfer fee to become the title owner. Otherwise, if the ebook goes unpurchased by its due date, it gets recalled back to the library shelf and made available to the next patron.

In 2022, I released a license agreement based on the a16z "Can't Be Evil" license with an added provision for the licensure of story lore.

The Token-Mediated Co-Author License, or ToMCAL, provided valid owners of a story vignette with a license to create derivative works for specific characters, settings, and timelines within the Wordler Village universe.

Valid ownership could be obtained, among other ways, by the purchase of a token through a royalty-compliant marketplace. Purchasers from non-compliant marketplaces would be asset holders, but not valid owners, and would therefore not be able to legally exercise any rights under the license until they made arrangements to cure their deficiency.

Today, I'd consider the ToMCAL to have been a primitive form of the right of reclaim.

• As with the proposed right of reclaim, the ToMCAL created two classes of ownership based on the payment or non-payment of a royalty or fee.

• As with the proposed right of reclaim, owners with a deficient title were able to subsequently cure their deficiency by paying the previously omitted fee.

• As with the proposed right of reclaim, owners could transfer their token from one owned wallet to another without any fee or penalty.

But the right of reclaim improves upon the ToMCAL by envisioning an onchain enforcement mechanism and the risk of losing a non-compliant asset entirely rather than just its licensed rights. As such, I would expect the right of reclaim to be even more effective at encouraging readers to pay secondary royalties while driving traffic away from non-compliant marketplaces that enable royalty theft.

Emerging blockchain technologies remain our best hope for finishing the long-incomplete ebook revolution, restoring author and reader rights, and creating a more sustainable and equitable digital publishing ecosystem. The task ahead is immense, but will be made far easier by the restoration of secondary royalties that once served as the main draw for authors into the onchain space and a necessary component for any used ebook marketplace.

The four methods outlined above, and the right of reclaim especially, offer ways to address issues of royalty theft and market volatility, ultimately paving the way for a future where authors are fairly rewarded for their work, where readers enjoy true ownership of their digital collections, and where a vibrant used ebook market benefits us all.