Resale Royalty in NFT Marketplaces: Blessing or Burden for Creators and Platforms?

Abstract

Non-fungible token (NFT) marketplaces enable users to mint and trade digital assets such as collectibles, trading cards, and digital artwork. Many of these platforms accommodate resale royalties, which return a predetermined percentage of the proceeds from future resales of the digital asset to the creator. While the adoption of resale royalties is seemingly beneficial for NFT creators by providing a recurring source of income, it may have unintended consequences on the sales price and liquidity of the underlying NFT, thereby affecting commission revenue for the platform. In this paper, we aim to understand the antecedents and consequences of resale royalties. Specifically, we empirically investigate the impact of minting costs on royalty rates, and subsequently the effects of resale royalties on primary market sales prices and liquidity. Our identification strategy combines a difference-in-differences model that leverages a policy change that eliminated upfront minting fees for creators and a large panel dataset from a leading NFT marketplace, and an instrumental variables approach. We find that NFT creators reduce royalty rates when they mint an NFT without incurring a minting cost. Furthermore, we observe that higher royalty rates lead to reduced sales prices in the primary market, suggesting the presence of a delayed gratification effect for creators in the hope of future royalty payments. We further investigate the underlying mechanisms and observe that NFT creators who are more confident about future resales lower their primary sale prices but are unable to recoup the losses in the near future, providing evidence of an overconfidence effect. Surprisingly, we find that the presence of resale royalties also impairs market liquidity despite reduced sales prices. Our work offers immediate implications for creators and platforms regarding resale royalty strategies and whether to enforce royalties.

Keywords: Non-Fungible Tokens (NFTs), Resale Royalty, Blockchain, Digital Art, Economics of IS, Difference-in-differences, Instrumental Variables