"It seems you pay to play = paid money to get commissions from others who pay money to get commissions" -- this is exactly right. However, once  an individual build enough team under her/him, he or she can get what they call "spill over" commission. No body can seem to explain how the spill over commission gets distributed as it is something to do with computer algorithm and it is random. Individuals have earned ethereum commissions without having referred anyone. 

I thought about the smart contract as more like a royalty like you said. 

I am wondering the same thing whether someone gets 1099 Misc or 1099K.

Still searching on IRS website but no luck yet so far other than the FAQs on virtual currency. Thank you.