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Economics of NFTs: The Value of Creator Royalties

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  • Brett Hemenway Falk
  • Gerry Tsoukalas
  • Niuniu Zhang

Abstract

Non-Fungible Tokens (NFTs) promise to revolutionize how content creators (e.g., artists) price and sell their work. One core feature of NFTs is the option to embed creator royalties which earmark a percentage of future sale proceeds to creators, each time their NFTs change hands. As popular as this feature is in practice, its utility is often questioned because buyers, the argument goes, simply ``price it in at the time of purchase''. As intuitive as this argument sounds, it is incomplete. We find royalties can add value to creators in at least three distinct ways. (i) Risk sharing: when creators and buyers are risk sensitive, royalties can improve trade by splitting the risks associated with future price volatility; (ii) Dynamic pricing: in the presence of information asymmetry, royalties can extract more revenues from better-informed speculators over time, mimicking the benefits of ``dynamic pricing''; (iii) Price discrimination: when creators sell multi-unit NFT collections, royalties can better capture value from heterogeneous buyers. Our results suggest creator royalties play an important and sometimes overlooked role in the economics of NFTs.

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  • Brett Hemenway Falk & Gerry Tsoukalas & Niuniu Zhang, 2022. "Economics of NFTs: The Value of Creator Royalties," Papers 2212.00292, arXiv.org.
    • Handle: RePEc:arx:papers:2212.00292
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    1. Gérard P. Cachon & Robert Swinney, 2009. "Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 55(3), pages 497-511, March.
    2. Stefano Lovo & Christophe Spaenjers, 2018. "A Model of Trading in the Art Market," American Economic Review, American Economic Association, vol. 108(3), pages 744-774, March.
    3. Matthieu Nadini & Laura Alessandretti & Flavio Di Giacinto & Mauro Martino & Luca Maria Aiello & Andrea Baronchelli, 2021. "Mapping the NFT revolution: market trends, trade networks and visual features," Papers 2106.00647, arXiv.org, revised Sep 2021.
    4. Lauren Haaften-Schick & Amy Whitaker, 2022. "From the Artist’s Contract to the blockchain ledger: new forms of artists’ funding using equity and resale royalties," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 46(2), pages 287-315, June.
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    Cited by:

    1. Oh, Sebeom, 2023. "Market Manipulation in NFT Markets," MPRA Paper 116704, University Library of Munich, Germany.

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