Article reproduced from: IOSG
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 what changes Story Protocol is about to bring to the IP industry with its massive $140 million financing.
1. Current state of the IP intellectual property industry
Since the Digital Millennium Copyright Act was enacted 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 sales of the IP industry have expanded to reach $356 billion by 2024, generating $44 billion in royalties for IP owners.
To better understand the landscape of intellectual property, 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 providing 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 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 the total IP licensing sales are conducted through intermediaries, such as consulting firms and law firms as mentioned above.
2.1 Friction 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 participate. The manual management tasks of recording 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 and more inclined to infringe. Traditionally, for licensing transactions that occur 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 extremely 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 have 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 SY Lee, founder of Story Protocol, points out, content businesses often lack network effects, forcing them to rely on massive content production and marketing budgets to survive. This overwhelming bargaining power makes it difficult for smaller IPs to profit, often leading to their failure before launch. Even large IP studios hesitate to develop new IP, choosing instead to focus on expanding existing IP.
For instance, Moloco reported that after Apple banned targeted advertising towards mobile consumers, the cost per install skyrocketed, leading many mobile applications to fade away. To counter 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 IPs 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. Below are the challenges faced by the traditional IP industry and why we believe Web 3 can help solve these issues.
3. Opportunities in Web3
The IP industry faces significant problems of inefficiency and transparency, while Web 3 offers potential solutions. But haven't NFTs and related protocols already solved these problems?
3.1 Is having only NFTs enough?
It is undeniable that the advent of NFTs (i.e., ERC-721 tokens) has indeed 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 because 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 automatic metadata updates triggered by on-chain or off-chain events.
Another important issue surrounding NFTs is liquidity and royalties, which is a widely explored area in NFT monetization. Sudoswap addresses liquidity challenges through the AMM model, 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 further improves 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 has 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, the Floor Protocol attempts to break down NFTs into micro-tokens called μ-Tokens, making them easier to use. The royalties of NFTs remain a contentious issue, with past disputes between Blur and OpenSea. Magic Eden has taken a clear stance by imposing royalties on 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 there is still a critical component missing: the ability to support creators' programmability of 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 participate, the greater the long-term benefits for the IP. This creates a dilemma that requires better solutions to effectively manage and enforce licensing agreements.
However, derivatives of IP often involve complex parent-child relationships that are difficult to handle. Current NFT protocols struggle to track the connections between each version created on-chain and effectively implement customized royalty structures or licensing agreements.
When Luca Netz, CEO of Pudgy Penguins, sold over 20,000 toys on the Amazon platform in just two days, the cumbersome process of needing to sign partial authorizations with individual NFT holders added extra time and legal costs.
Source: TinTinLand
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. The core of GitHub is Git, which tracks every change 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 the Web 2 and Web 3 ecosystems. In the context of Web 2, the importance of intellectual property is evident through the rise of AI-generated content (AIGC) and user-generated content (UGC). Similarly, in Web 3, the relevance of IP ownership 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, demonstrate the significance of derivative works in this space. These meme coins exhibit enormous trading volumes, yet the original creator, Matt Furie, has found it difficult to capture the economic value generated by these derivative assets.
For example, while $PEPE and $PEPE2.0 are viewed by the market as different tokens, $PEPE2.0 is essentially a derivative asset of $PEPE, distinguished only by a color change. This situation highlights the limitations of the current IP management framework in Web 3. Utilizing the IP tracking capabilities of the Story Protocol, the original holder of $PEPE should capture the value creation of their IP.
Under such a new mechanism, either a portion of the Pepe-themed derivative tokens can be airdropped to IP owners, or a portion of transaction fees can be directly given to IP owners, allowing the original creator of the Pepe-themed IP, Matt Furie, to benefit economically.
Clearly, there is a need for a more effective solution to manage the relationships between IP asset derivatives, one that offers greater programmability, which is precisely the solution that Story Protocol is actively developing.
4. Story Protocol
The main innovation of the Story Protocol is its ability to provide IP owners with a comprehensive and open solution to manage their IP assets. This includes functions such as verification, authorization, traceability, and automatic profit distribution and claims, all with enhanced programmability. The Story Protocol builds an EVM-compatible L1 blockchain using the Cosmos-SDK, allowing IP owners to easily register their intellectual property as IP assets on L1.
The Story Protocol records 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, the Story Protocol has also developed a coded contract template called Programmable IP License (PIL). Through PIL, IP owners can map off-chain licensing terms onto the blockchain by attaching PIL to their IP assets.
Programmable IP Licenses (PIL) embody the principle of 'code as law' in the blockchain space and provide three predefined templates:
Non-Commercial Social Remixing: Non-commercial use: This template allows users to freely use, share, and remix the original IP in social contexts, but explicitly prohibits any commercial use.
Commercial Use: Commercial use rights but prohibits resale and derivative development: This template allows users to purchase the rights to use the original IP at a preset price but prohibits reselling the original IP or using it to create and sell commercial derivatives.
Commercial Remix: Commercial use rights allowing resale and derivative development: Based on the commercial use template, it allows secondary creation and commercial use of derivatives.
An IP asset can have multiple different PILs. In addition to the three preset templates, users can also customize their own terms of use. These terms are open and transparent to all participants. Other creators can view these terms, and if they agree, they can obtain a license with just one click and immediately start creating derivative works.
When derivative works generate revenue, smart contracts automatically distribute royalties between the original IP creator and the derivative work creator according to the preset terms of the original IP. This process is efficient and transparent, requiring no third-party intervention, ensuring that profits are fairly and timely distributed to all participants. In addition to openness, licensing, and royalty distribution, the Story Protocol also includes a dispute module specifically for rights verification. This module allows IP owners to report creators of IP derivatives in cases of infringement. Currently, the legal team of Story Protocol acts as arbitrators, but this may be handed over to third-party legal teams for arbitration in the future.
In the above example, we can see how Azuki IP NFTs generate commercial revenue for both IP owners and derivative creators through the process of derivative creation and profit distribution.
4.1 From liquidity shortage to liquidity
The Story Protocol acts 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. Customizations of IP are, in fact, limitless, and when excessive customization occurs, it can lead to potential liquidity issues in financial markets. How can this problem be solved? What automated matching solutions can be implemented to meet the diverse preferences of the demand side?
Resolving market liquidity issues is a key factor that differentiates Story Protocol from competitors like Spaceport.
Through the licensing module and royalty module, all users of the Story Protocol (including IP owners and derivative creators) primarily trade two types of tokens: licensing 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 fees or purchased on the secondary market. When the license token is destroyed, the holder accepts the terms of the intellectual property license, allowing them to start creating derivative works. This system transforms the rights to derive intellectual property into tradable assets, providing new income opportunities for creators.
Royalty Tokens (ERC-20 tokens, supply of 1 billion): These tokens represent a portion of the income generated by 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 part of this income, making future income streams from intellectual property more liquid and available for creators and investors to use.
License tokens transform the rights to derive intellectual property into tradable liquid assets, providing creators with diversified income sources. Meanwhile, royalty tokens, as asset-backed securities, can tokenize future cash flows, enhancing the liquidity of 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 future income from IP.
The 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 across different chains, thereby reducing their overall value. The L1 structure of the Story Protocol addresses this issue by consolidating liquidity in one place, preventing asset value from being diluted across multiple blockchains.
Additionally, the royalty payment and licensing modules of the Story Protocol 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 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 arrival of the AIGC era. AIGC represents a revolutionary shift in the way creative works are produced, utilizing 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 field remain unresolved. Traditional intellectual property laws allow IP owners to decide how their works can be used, including creating new derivative works based on the original. But for Gen AI-generated content, there is no clear legal framework for copyright confirmation.
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 requires further clarification and improvement in copyright law.
Today, Gen AI has generated a large 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 keep calm. A very obvious fact is that Web 3 is still in the development stage, as described in the innovation diffusion model, transitioning from early adopters to early majority.
Source: Everett Rogers' theory of innovation diffusion
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 reaching all-time highs. We believe that with the widespread adoption of Web3, combined with the advancements of the Story Protocol itself, the IP era will develop in an ideal direction.
