ERC-5173: NFT Future Rewards (nFR)

Abstract

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This proposal introduces the Non-Fungible Future Rewards (nFR) framework, extending ERC-721 tokens (NFTs) features to let token holders benefit from value appreciation after transferring ownership. By integrating cooperative game theory, it aligns stakeholder incentives, addressing inefficiencies in asset transactions. The framework fosters collaboration, transparency, and equitable profit sharing. It improves equity and efficiency, recognizes all ownership stages, and establishes a cooperative asset transaction model.

Motivation

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Traditional financial markets are often characterized by inefficiencies, opaque practices, and systemic imbalances, resulting in significant disadvantages for the majority of participants. Although blockchain technology offers transaction transparency, current implementations do not adequately facilitate equitable value sharing or participant alignment. This proposal addresses these gaps by introducing structured collaboration and a fair compensation system, ensuring equitable rewards for contributions to asset value.

Framework Components

The Flow mechanism

Each ERC-5173 token maintains an immutable record of ownership and price transitions, creating a dedicated network of historical token owners. This unique community collaborates to generate additional value and maintains vested interest in the project or token even after selling, ensuring contributors benefit from the asset's appreciation. This mechanism promotes collaborative value creation, equitable profit sharing, and a connected financial ecosystem, distinct from traditional financial market systems.

Cooperative Value (Future Rewards) Distribution

The nFR framework transforms the zero-sum financial equation:

Where:

• P(A): Profit of trader A
• P(B): Profit of trader B
• F: Transaction fees, friction costs, and operational expenses

into a collaborative model:

Where:

• FR: Shared value creation through cooperative mechanisms

This model incentivizes fairness and rewards contributions throughout the asset lifecycle.

Specification

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The key words “MUST”, “MUST NOT”, “REQUIRED”, “SHALL”, “SHALL NOT”, “SHOULD”, “SHOULD NOT”, “RECOMMENDED”, “MAY”, and “OPTIONAL” in this document are to be interpreted as described in RFC 2119.

The following is an extension of the ERC-721 standard.

ERC-721-compliant contracts MAY implement this EIP for rewards to provide a standard method of rewarding future buyers and previous owners with realized profits in the future.

Implementers of this standard MUST have all of the following functions:

An nFR contract MUST implement and update for each Token ID. The data in the FRInfo struct MAY either be stored wholly in a single mapping, or MAY be broken down into several mappings. The struct MUST either be exposed in a public mapping or mappings, or MUST have public functions that access the private data. This is for client-side data fetching and verification.

Additionally, an nFR smart contract MUST store the corresponding ListInfo for each Token ID in a mapping. A method to retrieve a Token ID’s corresponding ListInfo MUST also be accessible publicly.

An nFR smart contract MUST also store and update the amount of Ether allocated to a specific address using the _allotedFR mapping. The _allottedFR mapping MUST either be public or have a function to fetch the FR payment allotted to a specific address.

Percent Fixed Point

The allocatedFR MUST be calculated using a percentage fixed point with a scaling factor of 1e18 (X/1e18) - such as "5e16" - for 5%. This is REQUIRED to maintain uniformity across the standard. The max and min values would be - 1e18 - 1.

Default FR Info

A default FRInfo MUST be stored in order to be backward compatible with ERC-721 mint functions. It MAY also have a function to update the FRInfo, assuming it has not been hard-coded.

ERC-721 Overrides

An nFR-compliant smart contract MUST override the ERC-721 _mint, _transfer, and _burn functions. When overriding the _mint function, a default FR model is REQUIRED to be established if the mint is to succeed when calling the ERC-721 _mint function and not the nFR _mint function. It is also to update the owner amount and directly add the recipient address to the FR cycle. When overriding the _transfer function, the smart contract SHALL consider the NFT as sold for 0 ETH, and update the state accordingly after a successful transfer. This is to prevent FR circumvention. Additionally, the _transfer function SHALL prevent the caller from transferring the token to themselves or an address that is already in the FR sliding window, this can be done through a require statement that ensures that the sender or an address in the FR sliding window is not the recipient, otherwise, it’d be possible to fill up the FR sequence with one’s own address or duplicate addresses. Finally, when overriding the _burn function, the smart contract SHALL delete the FRInfo and ListInfo corresponding to that Token ID after a successful burn.

Additionally, the ERC-721 _checkOnERC721Received function MAY be explicitly called after mints and transfers if the smart contract aims to have safe transfers and mints.

Safe Transfers

If the wallet/broker/auction application will accept safe transfers, then it MUST implement the ERC-721 wallet interface.

Listing, Unlisting, and Buying

The list, unlist, and buy functions MUST be implemented, as they provide the capability to sell a token.

The list function accepts a tokenId and a salePrice and updates the corresponding ListInfo for that given tokenId after ensuring that the msg.sender is either approved or the owner of the token. The list function SHOULD emit the Listed event. The function signifies that the token is listed and at what price it is listed for.

The unlist function accepts a tokenId and it deletes the corresponding ListInfo after the owner verifications have been met. The unlist function SHOULD emit the Unlisted event.

The buy function accepts a tokenId and MUST be payable. It MUST verify that the msg.value matches the token’s salePrice and that the token is listed, before proceeding and calling the FR _transferFrom function. The function MUST also verify that the buyer is not already in the FR sliding window. This is to ensure the values are valid and will also allow for the necessary FR to be held in the contract. The buy function SHOULD emit the Bought event.

Future Rewards _transferFrom Function

The FR _transferFrom function MUST be called by all nFR-supporting smart contracts, though the accommodations for non-nFR-supporting contracts MAY also be implemented to ensure backwards compatibility.

Based on the stored lastSoldPrice, the smart contract will determine whether the sale was profitable after calling the ERC-721 transfer function and transferring the NFT. If it was not profitable, the smart contract SHALL update the last sold price for the corresponding Token ID, increment the owner amount, shift the generations, and transfer all of the msg.value to the lister depending on the implementation. Otherwise, if the transaction was profitable, the smart contract SHALL call the _distributeFR function, then update the lastSoldPrice, increment the owner amount, and finally shift generations. The _distributeFR function or the FR _transferFrom MUST return the difference between the allocated FR that is to be distributed amongst the _addressesInFR and the msg.value to the lister. Once the operations have completed, the function MUST clear the corresponding ListInfo. Similarly to the _transfer override, the FR _transferFrom SHALL ensure that the recipient is not the sender of the token or an address in the FR sliding window.

Future Rewards Calculation

Marketplaces that support this standard MAY implement various methods of calculating or transferring Future Rewards to the previous owners.

In this example (Figure 1), a seller is REQUIRED to share a portion of their net profit with 10 previous holders of the token. Future Rewards will also be paid to the same seller as the value of the token increases from up to 10 subsequent owners.

When an owner loses money during their holding period, they MUST NOT be obligated to share Future Rewards distributions, since there is no profit to share. However, he SHALL still receive a share of Future Rewards distributions from future generations of owners, if they are profitable.

Figure 1: Geometric sequence distribution

The buyers/owners receive a portion ( r ) of the realized profit (P ) from an NFT transaction. The remaining proceeds go to the seller.

As a result of defining a sliding window mechanism ( n ), we can determine which previous owners will receive distributions. The owners are arranged in a queue, starting with the earliest owner and ending with the owner immediately before the current owner (the Last Generation). The First Generation is the last of the next n generations. There is a fixed-size profit distribution window from the First Generation to the Last Generation.

The profit distribution SHALL be only available to previous owners who fall within the window.

In this example, there SHALL be a portion of the proceeds awarded to the Last Generation owner (the owner immediately prior to the current seller) based on the geometric sequence in which profits are distributed. The larger portion of the proceeds SHALL go to the Mid-Gen owners, the earlier the greater, until the last eligible owner is determined by the sliding window, the First Generation. Owners who purchase earlier SHALL receive a greater reward, with first-generation owners receiving the greatest reward.

Future Rewards Distribution

Figure 2: NFT Owners' Future Rewards (nFR)

Figure 2 illustrates an example of a five-generation Future Rewards Distribution program based on an owner's realized profit.

The _distributeFR function MUST be called in the FR _transferFrom function if there is a profitable sale. The function SHALL determine the addresses eligible for FR, which would essentially be, excluding the last address in addressesInFR in order to prevent any address from paying itself. If the function determines there are no addresses eligible, i.e., it is the first sale, then it SHALL either return 0 if _transferFrom is handling FR payment or send msg.value to the lister. The function SHALL calculate the difference between the current sale price and the lastSoldPrice, then it SHALL call the _calculateFR function to receive the proper distribution of FR. Then it SHALL distribute the FR accordingly, making order adjustments as necessary. Then, the contract SHALL calculate the total amount of FR that was distributed (allocatedFR), in order to return the difference of the soldPrice and allocatedFR to the lister. Finally, it SHALL emit the FRDistributed event. Additionally, the function MAY return the allocated FR, which would be received by the FR _transferFrom function, if the _transferFrom function is sending the allocatedFR to the lister.

Future Rewards Claiming

The future Rewards payments SHOULD utilize a pull-payment model, similar to that demonstrated by OpenZeppelin with their PaymentSplitter contract. The event FRClaimed would be triggered after a successful claim has been made.

Owner Generation Shifting

The _shiftGenerations function MUST be called regardless of whether the sale was profitable or not. As a result, it will be called in the _transfer ERC-721 override function and the FR transferFrom function. The function SHALL remove the oldest account from the corresponding _addressesInFR array. This calculation will take into account the current length of the array versus the total number of generations for a given token ID.

Rationale

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Fixed Percentage to 10^18

Considering Fixed-Point Arithmetic is to be enforced, it is logical to have 1e18 represent 100% and 1e16 represent 1% for Fixed-Point operations. This method of handling percents is also commonly seen in many Solidity libraries for Fixed-Point operations.

Emitting Event for Payment

Since each NFT contract is independent, and while a marketplace contract can emit events when an item is sold, choosing to emit an event for payment is important. As the royalty and FR recipient may not be aware of/watching for a secondary sale of their NFT, they would never know that they received a payment except that their ETH wallet has been increased randomly.

The recipient of the secondary sale will therefore be able to verify that the payment has been received by calling the parent contract of the NFT being sold, as implemented in ERC-2981.

Number of Generations of All Owners ( n ) vs Number of Generations of Only Profitable Owners

It is the number of generations of all owners, not just those who are profitable, that determines the number of owners from which the subsequent owners' profits will be shared, see Figure 3. As part of the effort to discourage "ownership hoarding," Future Rewards distributions will not be made to the current owner/purchaser if all the owners lose money holding the NFT. Further information can be found under Security Considerations.

Figure 3: Losing owners

Single vs Multigenerations

In a single generation reward, the new buyer/owner receives a share of the next single generation's realized profit only. In a multigenerational reward system, buyers will have future rewards years after their purchase. The NFT should have a long-term growth potential and a substantial dividend payout would be possible in this case.

We propose that the marketplace operator can choose between a single generational distribution system and a multigenerational distribution system.

Direct FR Payout by the Seller vs Smart Contract-managed Payout

FR payouts directly derived from the sale proceeds are immediate and final. As part of the fraud detection detailed later in the Security Considerations section, we selected a method in which the smart contract calculates all the FR amounts for each generation of previous owners, and handles payout according to other criteria set by the marketplace, such as reduced or delayed payments for wallet addresses with low scores, or a series of consecutive orders detected using a time-heuristic analysis.

Equal vs Linear Reward Distributions

Equal FR Payout

Figure 4: Equal, linear reward distribution

FR distributions from the realization of profits by later owners are distributed equally to all eligible owners (Figure 4). The exponential reward curve, however, may be more desirable, as it gives a slightly larger share to the newest buyer. Additionally, this distribution gives the earliest generations the largest portions as their FR distributions near the end, so they receive higher rewards for their early involvement, but the distribution is not nearly as extreme as one based on arithmetic sequences (Figure 5).

This system does not discriminate against any buyer because each buyer will go through the same distribution curve.

Straight line arithmetic sequence FR payout

Figure 5: Arithmetic sequence distribution

The profit is distributed according to the arithmetic sequence, which is 1, 2, 3, ... and so on. The first owner will receive 1 portion, the second owner will receive 2 portions, the third owner will receive 3 portions, etc.

Backwards Compatibility

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This proposal is fully compatible with current ERC-721 standards and ERC-2981. It can also be easily adapted to work with ERC-1155.

Test Cases

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This contract contains the reference implementation for this proposal.

Here is a visualization of the test case.

As a result of implementing ERC-5173, a new project has been launched called untrading.org.

Reference Implementation

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This implementation uses OpenZeppelin contracts and the PRB Math library created by Paul R Berg for fixed-point arithmetic. It demonstrates the interface for the nFR standard, an nFR standard-compliant extension, and an ERC-721 implementation using the extension.

The code for the reference implementation is here.

Distribution of NFT Royalties to Artists and Creators

We agree that artists’ royalties should be uniform and on-chain. We support ERC-2981 NFT royalty Standard proposal.

All platforms can support royalty rewards for the same NFT based on on-chain parameters and functions:

• No profit, no profit sharing, no cost;
• The question of "who owned it" is often crucial to the provenance and value of a collectible;
• The previous owner should be re-compensated for their ownership;
• And the buyer/owner incentive in FR eliminates any motive to circumvent the royalty payout schemes;

Distribution of NFT Owners’ Future Rewards (FRs)

Future Rewards calculation

Any realized profits (P) when an NFT is sold are distributed among the buyers/owners. The previous owners will take a fixed portion of the profit (P), and this portion is called Future Rewards (FRs). The seller takes the rest of the profits.

We define a sliding window mechanism to decide which previous owners will be involved in the profit distribution. Let's imagine the owners as a queue starting from the first hand owner to the current owner. The profit distribution window starts from the previous owner immediately to the current owner and extends towards the first owner, and the size of the windows is fixed. Only previous owners located inside the window will join the profit distribution.

In this equation:

• P is the total profit, the difference between the selling price minus the buying price;
• R is buyer reward ratio of the total P;
• g is the common ratio of successive in the geometric sequence;
• n is the actual number of owners eligible and participating in the future rewards sharing. To calculate n, we have n = min(m, w), where m is the current number of owners for a token, and w is the window size of the profit distribution sliding window algorithm

Converting into Code

The complete implementation code can be found here.

Security Considerations

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Payment Attacks

As this ERC introduces royalty and realized profit rewards collection, distribution, and payouts to the ERC-721 standard, the attack vectors increase. As discussed by Andreas Freund regarding mitigations to phishing attacks, we recommend reentrancy protection for all payment functions to reduce the most significant attack vectors for payments and payouts.

Royalty Circumventing

Many methods are being used to avoid paying royalties to creators under the current ERC-721 standard. Through an under-the-table transaction, the new buyer's cost basis will be reduced to zero, increasing their FR liability to the full selling price. Everyone, either the buyer or seller, would pay a portion of the previous owner's net realized profits ( P x r ). Acting in his or her own interests, the buyer rejects any loyalty circumventing proposal.

FR Hoarding through Wash Sales

Quantexa blog and beincrypto articles have reported widespread wash trading on all unregulated cryptocurrency trading platforms and NFT marketplaces. The use of wash trading by dishonest actors can lead to an unfair advantage, as well as inflated prices and money laundering. When a single entity becomes multiple generations of owners to accumulate more rewards in the future, the validity of the system is undermined.

Wash trading by users

Using a different wallet address, an attacker can "sell" the NFT to themselves at a loss. It is possible to repeat this process n times in order to maximize their share of the subsequent FR distributions (Figure 6). A wallet ranking score can partially alleviate this problem. It is evident that a brand new wallet is a red flag, and the marketplace may withhold FR distribution from it if it has a short transaction history (i.e. fewer than a certain number of transactions).

We do not want a large portion of future rewards to go to a small number of wash traders. Making such practices less profitable is one way to discourage wash trading and award hoarding. It can be partially mitigated, for example, by implementing a wallet-score and holding period-based incentive system. The rewards for both parties are reduced if a new wallet is used or if a holding period is less than a certain period.

Figure 6: Same owner using different wallets

Wash trading by the marketplace operator

However, the biggest offender appears to be the marketplace, which engages heavily in wash trading, or simply does not care about it, according to Decrypt. The authors have personally experienced this phenomenon. A senior executive of a top-5 cryptocurrency exchange boasted during a mid-night drinking session in 2018, that they had "brushed" (wash-traded) certain newly listed tokens, which they called "marketmaking." The exchange is still ranked among the top five crypto exchanges today.

Many of these companies engage in wash trading on their own or collude with certain users, and royalties and FR payments are reimbursed under the table. It is crucial that all exchanges have robust features to prevent self-trading. Users should be able to observe watchers transparently. Marketplaces should provide their customers with free access to an on-chain transaction monitoring service like Chainalysis Reactor.

Long/Cyclical FR-Entitled Owner Generations

In most cases, malicious actors will create excessively long or cyclical Future Rewards Owner Generations that will result in applications that attempt to distribute FR or shift generations running out of gas and not functioning. Therefore, clients are responsible for verifying that the contract with which they interact has an appropriate number of generations, so that looping over will not deplete the gas.

Copyright

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Copyright and related rights waived via CC0.