Economics of NFTs: The Value of Creator Royalties

50 Pages Posted: 7 Dec 2022 Last revised: 8 May 2024

See all articles by Brett Hemenway Falk

Brett Hemenway Falk

University of Pennsylvania - Department of Computer and Information Science

Bin Gu

Boston University - Questrom School of Business

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: May 8, 2024

Abstract

Non-Fungible Tokens (NFTs) are set to transform 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 rational buyers simply price in royalties upfront, neutralizing their impact. We show this intuition to be true only when markets are frictionless. When they aren't, royalties enable creators to capitalize on the presence of more sophisticated market players (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). These results offer testable predictions that could drive future research in NFT economics.

Suggested Citation

Hemenway Falk, Brett and Gu, Bin and Tsoukalas, Gerry and Zhang, Niuniu, Economics of NFTs: The Value of Creator Royalties (May 8, 2024). 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

Bin Gu

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
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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