Preface
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 official launch, let’s take a closer look at the changes Story Protocol is poised to bring to the IP industry with its massive $140 million funding.
1. Current state of the IP industry
Since the enactment of the Digital Millennium Copyright Act in 1998, the U.S. has addressed issues such as copyright infringement on the internet and digital platforms, focusing on preventing the illegal copying 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 brand recognition to attract customers (licensing in)
Demand Side:
IP distribution platforms: For example, gaming companies that offer value-added services to end buyers using IP.
Intermediaries:
Intellectual property professional services: Consulting and law firms that facilitate smooth transactions of intellectual property between IP owners and creators, as well as between creators and IP distribution platforms.
2. Pain points in the intellectual property industry
Despite advancements, 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 mentioned above.
2.1 Frictions in IP licensing
Due to the numerous intermediaries between supply and demand sides, independent IP creators often lack the time and resources to hire legal and consulting professionals. The manual management tasks of recording intellectual property contracts using Microsoft and Google tools (forms, documents, etc.) further delay and complicate the entire licensing process.
This makes secondary independent derivative creators reluctant to pay licensing fees to IP owners through official channels, preferring instead to infringe. Traditionally, for IP licensing transactions between two large companies, an escrow account must be used 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 typically wield excessive power in IP trade negotiations, especially when it comes to independent IP owners, as these platforms can precisely control the exposure and traffic for each IP.
As Story Protocol founder SY Lee points out, content companies often lack network effects, forcing them to rely on large content production and marketing budgets to survive. This overwhelming negotiating power makes it difficult for smaller IPs to become profitable, often leading to their failure before launch. Even large IP studios hesitate to develop new IP, preferring to focus on expanding existing IP.
For instance, Moloco reported that after Apple banned targeted advertising for 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 push back.
Source: Moloco
The most promising solution is to help small independent IP evolve into networks. Transforming intellectual property into a model of 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 issues in the IP industry go far beyond this; 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 obvious inefficiencies and transparency issues, while Web 3 offers potential solutions. But haven't NFTs and related protocols already resolved these problems?
3.1 Is NFT enough?
Undeniably, the emergence of NFTs (i.e., ERC-721 tokens) has introduced a permanent identifier for the ownership of specific metadata, such as verifiable 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 by encoding predefined conditions in smart contracts to allow for automatic metadata updates triggered by on-chain or off-chain events.
Another crucial issue surrounding NFTs is liquidity and royalties, a widely explored area in NFT financialization. Sudoswap addresses liquidity challenges through AMM models, achieving automatic price discovery and adjustment. This resolves liquidity issues in traditional markets like OpenSea, where sellers often wait for buyers to match prices.
Blur has further improved the NFT trading experience by reducing market fees to 0% and aggregating listings across various markets, allowing users to easily compare prices and liquidity across platforms. Additionally, Blur has launched Blend, a lending protocol that enables users to borrow without selling their NFTs.
Although AMM models and market aggregation increase liquidity, certain NFTs, especially rare or niche NFTs, may still face challenges with liquidity in funding pools. To address affordability and liquidity issues, Floor Protocol attempts to break down NFTs into micro-tokens called μ-Tokens, making them easier to use. Royalties for NFTs remain a contentious issue, as evidenced by past debates between Blur and OpenSea. Magic Eden has taken a clear stance by charging royalties for all ERC-721C series listed on its platform.
As NFTs continue to evolve, the building blocks of blockchain innovation in the field of intellectual property seem to be in place, but a key component is still missing: the ability to support creators' programmability of derivatives.
3.2 What is the programmability of derivatives?
IP owners require 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 benefit to the IP. This creates a dilemma, necessitating better solutions to effectively manage and enforce 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 the CEO of Pudgy Penguins, Luca Netz, sold over 20,000 toys on Amazon in just two days, the cumbersome process of signing partial licensing agreements with individual NFT holders added extra time and legal costs.
Source: TinTinLand
Derivatives programmability essentially refers to supporting IP owners and derivative creators in more efficient IP licensing and version control.
A simple analogy is Git and GitHub. The core of GitHub 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 ownership?
The creation and ownership of intellectual property are key elements in both 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 ownership is emphasized due to the popularity of meme coins. Examples such as $BRETT, $APU, $PEPE, and $PEPE2.0, which stem from the PEPE-themed Boy Club, showcase the significance of derivative works in this space. These meme coins exhibit tremendous trading volumes, yet the original creator, Matt Furie, struggles to capture the economic value generated by these derivative assets.
For example, while $PEPE and $PEPE2.0 are viewed as different tokens by the market, $PEPE2.0 is essentially a derivative asset of $PEPE, differentiated only by color. 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.
In such a new mechanism, either a portion of Pepe-themed derivative tokens is airdropped to IP owners, or a portion of transaction fees is paid directly to IP owners, allowing the original creator of the Pepe-themed IP, Matt Furie, to benefit economically.
There is clearly a need for a more effective solution 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 to manage their IP assets. This includes features such as verification, authorization, traceability, and automatic 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 the multi-level parent-child relationships between various 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 on-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 to the blockchain by attaching the PIL to their IP assets.
Programmable IP Licenses (PIL) fully embody the principle of 'code is law' in the blockchain space and offer three predefined templates:
Non-Commercial Social Remixing: This template allows users to freely use, share, and remix the original IP in social contexts, but explicitly prohibits any commercial use.
Commercial Use: This template allows users to purchase the rights to use the original IP at a preset price, but prohibits resale of the original IP or its use for creating and selling commercial derivatives.
Commercial Remix: This template allows for commercial use and resale of derivative works based on the commercial use template, permitting secondary creation and commercial use of derivatives.
An IP asset can have multiple different PILs; in addition to the three predefined templates, users can also customize their own terms of use. These terms are publicly transparent to all participants. Other creators can view these terms and, if they agree, grant themselves permission with a click and immediately start creating derivative works.
When derivative works generate revenue, smart contracts will automatically distribute royalties between the original IP creator and the derivative creator based on the preset terms of the original IP. This process is efficient and transparent, requiring no third-party intervention, ensuring profits are distributed fairly and promptly 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 creators of derivative works in instances of copyright infringement. Currently, the legal team of Story Protocol acts as arbitrators, but in the future, this may be handed over to third-party legal teams for arbitration.
In the above example, we can see how the Azuki IP NFT generates commercialization revenue for both IP owners and derivative creators through the process of derivative creation and profit distribution.
4.1 From insufficient liquidity to liquidity
Story Protocol, as a new intermediary, replaces 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 unevenness. The customization of IP is essentially limitless, and when excessive customization occurs, it can lead to potential liquidity issues in financial markets. How can this problem be addressed? What automated matching solutions can be implemented to meet the diverse preferences of the demand side?
Addressing market liquidity issues is a key factor that sets Story Protocol apart 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 derivatives of 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, 1B supply): These tokens represent a portion of the revenue generated from intellectual property. Revenue comes from three sources: fees for minting license tokens, IP usage revenue, and revenue sharing between the original IP and its derivatives. Royalty tokens allow holders to claim a portion of this revenue, making future income streams from intellectual property more liquid and available for creators and investors.
License tokens convert intellectual property derivative rights into tradable liquid assets, providing creators with diversified income sources. Meanwhile, 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 income rights of intellectual property assets to be traded like financial assets. Additionally, buying or selling IP royalty tokens reflects investors' optimistic or pessimistic sentiments about the future income of the IP.
Story Protocol stands out due to its L1 architecture. By registering all IP assets on a single L1, it ensures unified processing of these assets and prevents liquidity fragmentation. For instance, treating meme coins as a form of intellectual property asset. Although meme coins are typically ERC-20 tokens, converting them to ERC-721 would essentially represent them as meme NFTs.
IP assets deployed on different blockchains (e.g., $MOODENG) are often seen as different tokens, even if they represent the same underlying asset. This leads to liquidity competition between the same tokens on different chains, diminishing their overall value. The L1 structure of Story Protocol addresses this issue by integrating liquidity into a single location, 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 large number of copycat ways, such as $NEIRO, $Neiro, and $NEIROETH. By introducing royalties, the cost of launching new meme coin derivatives will increase, thereby preventing the excessive and unsustainable proliferation of these tokens.
4. The future of IP + Web 3.0 is promising
All of this sounds very exciting; in fact, we can clearly imagine how the traditional IP industry will be massively disrupted by blockchain.
Especially with the advent of the AIGC era. AIGC represents a revolutionary shift in the creation of creative works, using advanced artificial intelligence 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 field remain unresolved. Traditional intellectual property laws allow IP owners to decide how to use their works, including creating new derivative works based on the original. But there is no clear legal framework for copyright confirmation for content generated by Gen AI.
An unresolved situation is whether these AI-generated works should be considered unauthorized derivatives or entirely new intellectual property. This is an urgent issue that copyright law needs to clarify and improve.
Today, Gen AI has generated a vast amount of content based on existing IP. For protocols like Story, it is crucial to help establish IP ownership within AIGC and address the traceability, liquidity, and royalty distribution challenges of these AIGC IPs.
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, with active addresses and usage hitting all-time highs. We believe that with the mass adoption of Web 3, combined with the advancements of Story Protocol itself, the IP era will progress in the right direction.
