Economics of NFTs: The Value of Creator Royalties

38 Pages Posted: 7 Dec 2022

See all articles by Brett Hemenway Falk

Brett Hemenway Falk

University of Pennsylvania - Department of Computer and Information Science

Gerry Tsoukalas

University of Pennsylvania - The Wharton School; Boston University; Luohan Academy

Niuniu Zhang

University of Pennsylvania - Department of Computer and Information Science

Date Written: November 22, 2022

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.

Suggested Citation

Hemenway Falk, Brett and Tsoukalas, Gerry and Zhang, Niuniu, Economics of NFTs: The Value of Creator Royalties (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=4284776. or http://dx.doi.org/10.2139/ssrn.4284776

Brett Hemenway Falk

University of Pennsylvania - Department of Computer and Information Science ( email )

3330 Walnut Street
Philadelphia, PA 19104
United States

Gerry Tsoukalas (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Luohan Academy ( email )

No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
China

Niuniu Zhang

University of Pennsylvania - Department of Computer and Information Science ( email )

3330 Walnut Street
Philadelphia, PA 19104
United States

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