Economics of NFTs: The Value of Creator Royalties

TL;DR

This paper analyzes how NFT creator royalties function under realistic market conditions, showing they enable risk sharing, reduce information asymmetry, and increase trade volume, contrary to critics' claims.

Contribution

It demonstrates that royalties provide significant benefits in non-ideal markets, expanding trade and offering new insights for empirical research and platform design.

Findings

Royalties enable risk sharing among creators and speculators.

Royalties mitigate information asymmetry in NFT markets.

Royalties increase transaction volume and trade in NFT platforms.

Abstract

Non-Fungible Tokens (NFTs) are transforming how content creators, such as artists, price and sell their work. A key feature of NFTs is the inclusion of royalties, which grant creators a share of all future resale proceeds. Although widely used, critics argue that sophisticated speculators, who dominate NFT markets, simply price in royalties upfront, neutralizing their impact. We show this intuition holds only under perfect, frictionless markets. Under more realistic market conditions, royalties enable creators to capitalize on the presence of speculators in at least three ways: They can enable risk sharing (under risk aversion), mitigate information asymmetry (when speculators are better informed), and unlock price discrimination benefits (in multi-unit settings). Moreover, in all three cases, royalties meaningfully expand trade, implying increased transaction volume for platforms. These results offer testable predictions that can guide both empirical research and platform design.