Last week, Story Protocol announced the launch of its final testnet. Nearly 100 ecosystem partners are building killer applications on Odyssey. As the last testnet before the formal launch, what changes will Story Protocol bring to the IP industry with its massive funding?
Written by: IOSG Ventures
Introduction
Last week, Story Protocol announced the launch of its final testnet, Odyssey. Nearly 100 ecosystem partners are building killer applications on Odyssey. As the last testnet before the formal launch, let's take a closer look at the changes that Story Protocol will bring to the IP industry with its $140 million funding.
1. Current State of the Intellectual Property Industry
Since the enactment of the Digital Millennium Copyright Act in the U.S. in 1998, issues such as copyright infringement on the internet and digital platforms have been addressed, focusing on preventing the illegal reproduction and distribution of copyrighted works. Since then, the global retail revenue of the intellectual property industry has expanded to $356 billion by 2024, generating $44 billion in royalties for IP owners.
To better understand the intellectual property landscape, we need to familiarize ourselves with the key participants here:
Supply Side:
IP Owners: Grant licenses for their content in exchange for royalties (licensing out)
IP Creators: Obtain these licenses and leverage the brand's visibility to attract customers (licensing in)
Demand Side:
IP Distribution Platforms: For example, game companies that provide value-added services using IP to end buyers.
Intermediaries:
Intellectual Property Professional Services: Consulting firms and law firms that facilitate smooth transactions of intellectual property between IP owners and IP creators, as well as between IP creators and IP distribution platforms.
2. Pain Points in the Intellectual Property Industry
Despite progress, the current intellectual property industry is far from perfect. Today, nearly 80% of total IP licensing sales are conducted through intermediaries, such as consulting and law firms as previously mentioned.
2.1 Frictions in IP Licensing
Due to the numerous intermediaries between supply and demand, independent IP creators often lack the time and resources to hire legal and consulting professionals to get involved. The manual management tasks of documenting intellectual property contracts using Microsoft and Google tools (spreadsheets, documents, etc.) further delay and complicate the entire licensing process.
This makes independent derivative creators reluctant to pay licensing fees to IP owners through official channels, preferring infringement instead. Traditionally, intellectual property licensing transactions between two large companies must use an escrow account as an intermediary. Both parties' lawyers must review and sign the contract before the transaction can proceed. Relying on escrow accounts is highly inefficient, and this process can be fully automated using smart contracts.
2.2 IP Distribution Platforms Hinder Innovation in Intellectual Property
Web 2 distribution platforms often hold too much power in IP transaction negotiations, especially when it comes to independent IP owners, as these platforms can precisely control the exposure and traffic of each IP.
As noted by Story Protocol founder SY Lee, content companies often lack network effects, forcing them to rely on large content production and marketing budgets for survival. This overwhelming bargaining power makes it difficult for smaller IP to profit, often leading to their failure before launching. Even large IP studios are hesitant to develop new IP and instead choose to focus on expanding existing IP.
For instance, Moloco reported that after Apple banned targeted ads to mobile consumers, the cost per install skyrocketed, leading many mobile applications to fade away. To combat the pricing power of Web 2 platforms, independent IP owners and creators need an effective way to fight back.
Source: Moloco
The most promising solution is to help small independent IP evolve into networks. Transforming intellectual property into fan and creator networks can help break these monopolistic structures and bring more value to IP owners.
Source: Story Protocol founder SY Lee
Of course, the challenges in the IP industry are far from limited to this, and here are the challenges faced by the traditional IP industry and why we believe Web 3 can help address these issues.
3. Opportunities in Web3
The IP industry faces significant inefficiencies and transparency issues, while Web 3 offers potential solutions. But haven't NFTs and related protocols already addressed these issues?
3.1 Is NFT enough?
Undeniably, the emergence of NFTs (i.e., ERC-721 tokens) has introduced a permanent identifier for verifiable ownership of specific metadata, such as text, images, and videos, effectively representing IP on the chain!
However, these NFTs are relatively static, as their metadata is fixed once minted. To address this limitation, dynamic NFTs (dNFTs) have been introduced, providing greater flexibility through predefined conditions encoded in smart contracts that allow for automatic metadata updates triggered by on-chain or off-chain events.
Another critical issue surrounding NFTs is liquidity and royalties, which is a broadly explored field in the financialization of NFTs. Sudoswap addresses liquidity challenges through the AMM model, achieving automatic price discovery and adjustment. This solves liquidity issues in traditional markets like OpenSea, where sellers often wait for buyers to match prices.
Blur further improved the NFT trading experience by reducing market fees to 0% and aggregating listings from various markets, allowing users to easily compare prices and liquidity across platforms. Additionally, Blur launched Blend, a lending protocol that enables users to borrow without selling NFTs.
Although the AMM model and market aggregation have increased liquidity, certain NFTs, especially rare or niche NFTs, may still face liquidity issues in funding pools. To address affordability and liquidity issues, Floor Protocol attempts to break NFTs down into micro-tokens called μ-Tokens, making them easier to use. NFT royalties remain a contentious issue, with past disputes between Blur and OpenSea. Magic Eden has taken a clear stance, imposing royalties on all ERC-721C series listed on its platform.
As NFTs continue to evolve, the building blocks of blockchain innovation in the intellectual property space seem to be in place, but one key component is still missing: the ability to support programmability for creator derivatives.
3.2 What is the programmability of derivatives?
IP owners need IP creators to create derivatives to maintain the visibility of their IP and extend its lifespan. The more creators involved, the greater the long-term benefits for that IP. This creates a dilemma that requires better solutions to effectively manage and execute licensing agreements.
However, derivative works of IP often involve complex parent-child relationships that are difficult to manage. Current NFT protocols struggle to track the connections between each version created on-chain and effectively implement customized royalty structures or licensing agreements.
When Pudgy Penguins' CEO Luca Netz sold over 20,000 toys on the Amazon platform within just two days, the cumbersome process of signing partial licenses with individual NFT holders added extra time and legal costs.
Source: TinTinLand
The programmability of derivatives essentially refers to supporting IP owners and derivative creators in more efficient IP licensing and version control.
A simple analogy is Git and GitHub. GitHub’s core is Git, which tracks every modification made to files. This version control system allows you to track and revert to any point in the version history.
So why is this programmable layer so important for IP creation and attribution?
Intellectual property creation and attribution are key elements in the Web 2 and Web 3 ecosystems. In the context of Web 2, the importance of intellectual property is evident with the rise of AI-generated content (AIGC) and user-generated content (UGC). Similarly, in Web 3, the relevance of IP attribution is emphasized by the popularity of meme coins. Examples such as $BRETT, $APU, $PEPE, and $PEPE2.0, which originate from the PEPE-themed boys' club, illustrate the significance of derivatives in this space. These meme coins exhibit substantial trading volumes, but the original creator, Matt Furie, finds it challenging to capture the economic value generated by these derivative assets.
For example, although $PEPE and $PEPE2.0 are viewed by the market as different tokens, $PEPE2.0 is essentially a derivative asset of $PEPE, differentiated only by color change. This situation highlights the limitations of the current IP management framework in Web 3. Utilizing Story Protocol's IP tracking capabilities, the original holder of $PEPE should capture the value creation of their IP.
Under this new mechanism, either a portion of Pepe-themed derivative tokens could be airdropped to IP owners, or a portion of transaction fees could be directly paid to IP owners, allowing the original creator of the Pepe-themed IP, Matt Furie, to benefit economically.
Clearly, a more effective solution is needed to manage the relationships between IP asset derivatives, providing greater programmability, which is exactly what Story Protocol is actively developing.
4. Story Protocol
The main innovation of Story Protocol lies in its ability to provide IP owners with a comprehensive and open solution for managing their IP assets. This includes features such as verification, authorization, traceability, and automated profit distribution and claims, all with enhanced programmability. Story Protocol has built an EVM-compatible L1 blockchain using Cosmos-SDK, allowing IP owners to easily register their intellectual property as IP assets on L1.
Story Protocol records various multi-level parent-child relationships between IP assets, where each asset can be a Web 3 native NFT or an on-chain proof NFT of real-world IP, such as Donald Duck. In bringing real-world IP onto the chain, Story Protocol has also developed a code-based contract template called Programmable IP License (PIL). Through PIL, IP owners can map off-chain licensing terms onto the blockchain by attaching the PIL to their IP assets.
Programmable IP License (PIL) embodies the principle of 'code is law' in the blockchain space and offers three predefined templates:
Non-Commercial Social Remixing: This template allows users to freely use, share, and remix original IP in social environments, but explicitly prohibits any commercial use.
Commercial Use: This template allows users to purchase the rights to use original IP at a preset price, but prohibits the resale of the original IP or using it to create and sell commercial derivatives.
Commercial Remix: Based on the commercial use template, allows secondary creation and commercial use of derivatives.
An IP asset can have multiple different PILs. In addition to the preset three templates, users can also customize their own usage terms. These terms are open and transparent to all participants. Other creators can view these terms, and if they agree, they can obtain permission with a single click and start creating derivative works immediately.
When derivative works generate income, smart contracts automatically distribute royalties between the original IP creator and the derivative creator based on preset terms of the original IP. This process is efficient, transparent, and requires no third-party intervention, ensuring that profits are fairly and timely distributed to all participants. In addition to openness, licensing, and royalty distribution, Story Protocol also includes a dispute module specifically for rights verification. This module allows intellectual property owners to report derivative creators in cases of intellectual property infringement. Currently, Story Protocol's legal team acts as arbitrators, but this may be delegated to a third-party legal team in the future.
In the example above, we can see how the Azuki IP NFT creates a process of profit sharing through derivatives, allowing both IP owners and derivative creators to earn their respective commercial revenues.
4.1 From Liquidity Shortage to Liquidity
Story Protocol serves as a new intermediary, replacing traditional intermediaries such as costly and cumbersome legal and consulting services. This innovation significantly lowers the entry barrier for IP licensing while ensuring that derivative and remix works are controllable and traceable, ultimately protecting the originality of IP owners and derivative creators.
However, some may express concerns about market non-uniformity. The customization of IP is virtually limitless, and when over-customization occurs, it can lead to potential liquidity issues in financial markets. How can this issue be addressed? What automated matching solutions can be implemented to meet the diverse preferences of demand-side?
Addressing market liquidity issues is a key factor that differentiates Story Protocol from competitors like Spaceport.
Through the licensing and royalty modules, all users of Story Protocol (including IP owners and derivative creators) primarily trade two types of tokens: license tokens and royalty tokens.
License Tokens (ERC-721): These tokens grant rights to use intellectual property or create derivative works based on intellectual property. They can be minted by paying a fee or purchased on the secondary market. When a license token is destroyed, the holder accepts the licensing terms of the intellectual property, allowing them to start creating derivative works. This system transforms intellectual property derivative rights into tradable assets, providing new income opportunities for creators.
Royalty Tokens (ERC-20 tokens, supply of 1B): These tokens represent a portion of the income generated from intellectual property. Revenue comes from three sources: fees for minting license tokens, income from IP usage, and revenue sharing between the original IP and its derivatives. Royalty tokens allow holders to claim a portion of that income, making future revenue streams from intellectual property more liquid and available to creators and investors.
License tokens transform intellectual property derivative rights into tradable liquid assets, providing creators with diverse income sources. At the same time, royalty tokens, as asset-backed securities, can tokenize future cash flows, thereby enhancing liquidity for intellectual property asset owners and investors. This process reflects the benefits of asset securitization, allowing the revenue rights of intellectual property assets to be traded like financial assets. Additionally, buying or selling IP royalty tokens reflects investors' optimism or pessimism about the future income of IP.
Story Protocol stands out for its L1 architecture. By registering all IP assets on a single L1, uniform processing of these assets can be ensured, preventing liquidity fragmentation. For example, meme coins can be viewed as a form of intellectual property asset. Although meme coins are typically ERC-20 tokens, if converted to ERC-721, they would essentially represent meme NFTs.
IP assets deployed on different blockchains (e.g., $MOODENG) are often treated as different tokens, even if they represent the same underlying asset. This leads to liquidity competition between the same tokens on different chains, thereby reducing their overall value. Story Protocol's L1 structure addresses this issue by consolidating liquidity in one place, preventing asset value from being diluted across multiple blockchains.
Additionally, Story Protocol's royalty payment and licensing modules help control the creation of derivative memecoins in a copycat manner, such as $NEIRO, $Neiro, and $NEIROETH. By introducing royalties, the cost of launching new meme coin derivatives increases, thereby preventing the excessive and unsustainable proliferation of these tokens.
4. IP + Web 3.0: A promising future
All of this sounds very exciting, and in fact, we can clearly imagine how traditional IP industries will be massively disrupted by blockchain.
Especially with the advent of the AIGC era. AIGC represents a revolutionary shift in how creative works are created, using advanced AI algorithms to automatically generate text, images, audio, and video, blurring the lines between human creativity and machine-generated output.
However, copyright issues in the Gen AI space remain unresolved. Traditional intellectual property law allows IP owners to decide how to use their works, including creating new derivative works based on the original. But for Gen AI generated content, there is no clear legal framework for copyright confirmation.
One unresolved situation is whether these AI-generated works should be regarded as unauthorized derivatives or entirely new intellectual property. This is an urgent question that requires further clarification and refinement of copyright law.
Today, Gen AI has generated a vast amount of content based on existing IP. For protocols like Story, helping establish IP ownership within AIGC and addressing the traceability, liquidity, and royalty distribution challenges of these AIGC IP is crucial.
Clearly, we still need to remain calm. A very obvious fact is that Web 3 is still in a developmental stage, as described in the innovation diffusion model, transitioning from early adopters to early majority.
Source: Everett Rogers' Diffusion of Innovations Theory
However, we believe that over time, this situation will naturally improve, and the reasons are clear. According to a recent a16z cryptocurrency status report, there are approximately 617 million cryptocurrency holders, and active addresses and usage have reached an all-time high. We believe that with the widespread adoption of Web3, combined with advancements in Story Protocol itself, the IP era will move in an ideal direction.
