How Story Protocol's Web3-Native IP Infrastructure Is Reshaping Industry Innovation and Leading the Cycle?
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How Story Protocol's Web3-Native IP Infrastructure Is Reshaping Industry Innovation and Leading the Cycle?
As the final testnet before official launch, what changes will Story Protocol bring to the IP industry through its massive funding?
Navigating Web3 tides with focused insightsBy: IOSG Ventures
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 full launch, let’s take a closer look at how Story Protocol—backed by a massive $140 million funding round—is poised to transform the IP industry.
1. The Current State of the IP Industry
Since the United States enacted the Digital Millennium Copyright Act in 1998, it has addressed issues such as online copyright infringement on the internet and digital platforms, primarily focusing on preventing the unauthorized copying and distribution of copyrighted works. Since then, the global retail value of the intellectual property (IP) industry has grown to $356 billion in 2024, generating $44 billion in royalties for IP rights holders.
To better understand the IP landscape, we need to become familiar with the key players:
Supply Side:
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IP Owners: Entities that grant licenses for their content in exchange for royalties (licensing out)
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IP Creators: Those who obtain these licenses and leverage brand recognition to attract customers (licensing in)
Demand Side:
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IP Distribution Platforms: For example, gaming companies that use IPs to offer value-added services to end consumers.
Intermediaries:
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IP Professional Services: Consulting firms and law firms that facilitate smooth IP transactions between IP owners and creators, as well as between creators and distribution platforms.
2. Pain Points in the Intellectual Property Industry
Despite progress, today’s IP industry remains far from perfect. Currently, nearly 80% of total IP licensing revenue is processed through intermediaries—consulting and law firms as mentioned above.
2.1 Friction in IP Licensing
The presence of numerous intermediaries between supply and demand often leaves independent IP creators lacking the time or resources to hire legal and consulting professionals. Manual management tasks—such as recording IP contracts using Microsoft and Google tools (spreadsheets, documents, etc.)—further delay and complicate the entire licensing process.
This discourages independent derivative creators from officially paying licensing fees to IP owners, pushing them toward infringement instead. Traditionally, IP licensing deals between two large corporations require escrow accounts as intermediaries. Transactions can only proceed after both parties’ lawyers review and sign off on contracts. This reliance on escrow accounts is extremely inefficient, and the entire process could be fully automated using smart contracts.
2.2 IP Distribution Platforms Hinder Innovation
Web 2 distribution platforms typically hold excessive power in IP transaction negotiations, especially when dealing with independent IP owners, as these platforms have precise control over exposure and traffic for each IP.
As Story Protocol founder SY Lee pointed out, content businesses usually lack network effects, forcing them to rely on heavy content production and marketing budgets just to survive. This overwhelming negotiating power makes it difficult for smaller IPs to profit, often causing them to fail before even launching. Even large IP studios hesitate to develop new IPs and instead focus on expanding existing ones.
For example, Moloco reported that after Apple banned targeted advertising for mobile users, cost per install skyrocketed, leading many mobile apps to shut down. To counter Web 2 platforms’ pricing power, 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 IP into fan and creator networks can help break up monopolistic structures and generate greater value for IP owners.
Source: SY Lee, Founder of Story Protocol
Of course, the problems in the IP industry go beyond this. Below are additional challenges faced by the traditional IP industry and why we believe Web3 can help solve them.
3. The Opportunity in Web3
The IP industry clearly suffers from inefficiency and lack of transparency, and Web3 offers potential solutions. But haven’t NFTs and related protocols already solved these issues?
3.1 Are NFTs Enough?
Undeniably, the invention of NFTs (specifically ERC-721 tokens) introduced a permanent identifier verifying ownership of specific metadata such as text, images, and videos, effectively representing IP on-chain!
However, these NFTs are relatively static, as their metadata becomes fixed once minted. To address this limitation, dynamic NFTs (dNFTs) were introduced, offering greater flexibility by encoding predefined conditions in smart contracts that allow automatic metadata updates triggered by on-chain or off-chain events.
Another critical issue surrounding NFTs is liquidity and royalties—an area widely explored in NFT financialization. Sudoswap tackles liquidity challenges via an AMM model, enabling automatic price discovery and adjustment. This resolves liquidity issues seen on traditional marketplaces like OpenSea, where sellers often wait indefinitely for buyers to match prices.
Blur improves the NFT trading experience further by reducing marketplace fees to 0% and aggregating listings across multiple markets, allowing users to easily compare prices and liquidity across platforms. Additionally, Blur launched Blend, a lending protocol that enables users to borrow against their NFTs without selling them.
Although AMM models and market aggregation enhance liquidity, certain NFTs—especially rare or niche ones—may still face illiquid pools. To address affordability and liquidity, Floor Protocol attempts to break down NFTs into micro-tokens called μ-Tokens, increasing accessibility. Royalties on NFTs remain controversial; there was previously a dispute between Blur and OpenSea. Magic Eden has taken a clear stance, enforcing royalties on all ERC-721C series listed on its platform.
As NFTs continue evolving, the building blocks for blockchain innovation in IP seem to be in place—but one crucial piece is still missing: the ability to support programmable derivatives creation.
3.2 What Is Programmability of Derivatives?
IP owners need creators to build derivative works to maintain awareness and extend the lifespan of their IP. The more creators participate, the greater the long-term benefit for the IP. This creates a dilemma requiring better solutions to efficiently manage and enforce licensing agreements.
Yet, derivative works often involve complex parent-child relationships that are difficult to handle. Current NFT protocols struggle to track connections between each version created on-chain and effectively implement customized royalty structures or licensing terms.
When Pudgy Penguins CEO Luca Netz sold over 20,000 toys on Amazon within just two days, the cumbersome process of signing partial licensing agreements with individual NFT holders added extra time and legal costs.
Source: TinTinLand
Derivative programmability essentially refers to supporting more efficient IP licensing and version control between IP owners and derivative creators.
A simple analogy is Git and GitHub. At its core, GitHub relies on Git, which tracks every modification made to files. This version control system allows you to trace and revert to any point in the version history.
So why is this programmable layer so important for IP creation and attribution?
IP creation and attribution are key elements in both Web2 and Web3 ecosystems. In the context of Web2, the importance of IP is evident in the rise of AI-generated content (AIGC) and user-generated content (UGC). Similarly, in Web3, the relevance of IP attribution is underscored by the popularity of meme coins. Examples such as $BRETT, $APU, $PEPE, and $PEPE2.0—originating from the PEPE-themed Boys Club—highlight the significance of derivative works in this space. These meme coins exhibit significant trading volume, yet the original creator, Matt Furie, struggles to capture the economic value generated by these derivatives.
For instance, while $PEPE and $PEPE2.0 are viewed by the market as distinct tokens, $PEPE2.0 is essentially a derivative asset of $PEPE, differentiated only by color. This situation highlights the limitations of current IP management frameworks in Web3. With Story Protocol's IP tracking capabilities, the original holder of $PEPE should be able to capture value created from its IP.
Under such a new mechanism, either a portion of Pepe-themed derivative tokens would be airdropped to the IP owner, or a share of transaction fees would be directly paid to the IP owner, allowing Matt Furie, the original creator of the Pepe IP, to benefit economically.
Clearly, a more effective solution is needed to manage relationships among IP asset derivatives—one that provides greater programmability. This is precisely the solution Story Protocol is actively developing.
4. Story Protocol
Story Protocol’s primary innovation lies in providing IP owners with a comprehensive, open solution to manage their IP assets. This includes features such as verification, licensing, traceability, automated profit distribution, and claims—all enhanced with greater programmability. Built using Cosmos-SDK, Story Protocol has developed an EVM-compatible L1 blockchain, allowing IP owners to easily register their intellectual property as IP assets on Layer 1.
Story Protocol records multi-level parent-child relationships among various IP assets, where each asset can be either a Web3-native NFT or an on-chain proof-of-existence NFT representing real-world IP, such as Donald Duck. In cases involving real-world IP, Story Protocol has also developed code-based contract templates known as Programmable IP Licenses (PIL). Through PILs, IP owners can map offline licensing terms onto the blockchain by attaching a PIL to their IP asset.
The Programmable IP License (PIL) fully embodies the principle of “code is law” in blockchain and offers three predefined templates:
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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.
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Commercial Use: Grants commercial usage rights but prohibits resale and derivative creation. This template allows users to purchase usage rights to the original IP at a preset price but forbids reselling the original IP or using it to create and sell commercial derivatives.
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Commercial Remix: Builds upon the Commercial Use template by allowing commercial derivative creation and resale.
An IP asset can have multiple different PILs. Beyond the three preset templates, users can also customize their own usage terms. These terms are publicly transparent to all participants. Other creators can view the terms, and if they agree, simply click to obtain a license and immediately begin creating derivative works.
When derivative works generate revenue, smart contracts automatically distribute royalties between the original IP creator and the derivative creator according to the original IP’s preset terms. This process is efficient, transparent, and requires no third-party intervention, ensuring fair and timely profit distribution to all participants. Beyond openness, licensing, and royalty distribution, Story Protocol also includes a dedicated dispute module for rights validation. This module allows IP owners to report derivative creators in cases of IP infringement. Currently, Story Protocol’s legal team acts as arbitrators, though in the future this role may be transferred to third-party legal teams.
In the example above, we can see how the Azuki IP NFT enables both the IP owner and derivative creators to earn commercial revenue through derivative creation and profit sharing.
4.1 From Illiquidity to Liquidity
Story Protocol serves as a new intermediary, replacing costly and cumbersome traditional intermediaries such as legal and consulting services. This innovation significantly lowers the barrier to IP licensing while ensuring derivative and remix works are controllable and traceable, ultimately protecting the originality of both IP owners and derivative creators.
However, some may raise concerns about market non-uniformity. Customization of IP is practically infinite, and excessive customization could 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 demand-side participants?
Solving market liquidity is a key factor distinguishing Story Protocol from competitors like Spaceport.
Through its 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.
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License Tokens (ERC-721): These tokens grant the right to use an IP or create derivative works based on it. They can be minted by paying a fee or purchased on secondary markets. When a License Token is burned, the holder accepts the IP’s licensing terms and is authorized to begin creating derivative works. This system transforms IP derivative rights into tradable assets, opening new revenue opportunities for original creators.
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Royalty Tokens (ERC-20, 1B supply): These tokens represent a share of the revenue generated by an IP. Revenue comes from three sources: fees from minting License Tokens, IP usage income, and revenue sharing between the original IP and its derivatives. Royalty Tokens allow holders to claim a portion of this income, making future revenue streams from IP more liquid and accessible to creators and investors alike.
License Tokens transform IP derivative rights into tradable, liquid assets, providing diversified income sources for original creators. Meanwhile, Royalty Tokens act as asset-backed securities, tokenizing future cash flows and enhancing liquidity for IP asset owners and investors. This process reflects the benefits of asset securitization, allowing the income rights of IP assets to be traded like financial assets. Moreover, buying or selling royalty tokens reflects investors’ bullish or bearish sentiment regarding an IP’s future revenue.
Story Protocol stands out due to its L1 architecture. By registering all IP assets on a single L1 chain, it ensures uniform handling of these assets and prevents liquidity fragmentation. For example, consider meme coins as a form of IP asset. Although meme coins are typically ERC-20 tokens, converting them into ERC-721 format would make them essentially represent meme NFTs.
IP assets deployed across different blockchains (e.g., $MOODENG) are often treated as separate tokens, even if they represent the same underlying asset. This leads to competition for liquidity between identical tokens across chains, thereby reducing their overall value. Story Protocol’s L1 structure solves this by consolidating liquidity in one place, preventing asset value dilution across multiple blockchains.
Additionally, Story Protocol’s royalty payment and licensing modules help control the rampant copycat creation of derivative memecoins such as $NEIRO, $Neiro, and $NEIROETH. By introducing royalties, the cost of launching new meme coin derivatives increases, deterring their excessive and unsustainable proliferation.
5. The Promising Future of IP + Web3
All of this sounds incredibly exciting—and indeed, we can already clearly envision how blockchain will massively disrupt the traditional IP industry.
Especially with the arrival of the AIGC era. AIGC represents a revolutionary shift in creative production, 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 field remain unresolved. Traditional IP laws allow IP owners to decide how their works are used, including creating new derivative works based on originals. But for content generated by Gen AI, there is no clear legal framework for copyright confirmation.
An unresolved question remains: Should these AI-generated works be considered unauthorized derivatives or entirely new intellectual properties? This is an urgent issue requiring further clarification and refinement of copyright law.
Today, Gen AI is already producing vast amounts of content based on existing IPs. For protocols like Story, it is crucial to help establish IP ownership within AIGC and address challenges related to traceability, liquidity, and royalty distribution for these AIGC-generated IPs.
Clearly, we must remain cautious. One obvious fact is that Web3 is still in development, transitioning from early adopters to the early majority, as described in the innovation diffusion model.
Source: Everett Rogers' Diffusion of Innovations Theory
Nevertheless, we believe this situation will naturally improve over time—and the reasons are clear. According to the recent a16z State of Crypto report, there are approximately 617 million cryptocurrency holders, with active addresses and usage reaching record highs. We believe that as Web3 achieves mass adoption, combined with Story Protocol’s own advancements, the IP era will move steadily toward its ideal direction.
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