The Role of Royalty Fee in NFT Markets

Abstract

Royalty payment has been under heated debate in both the traditional art market and the newly emerged non-fungible tokens (NFTs) markets. In this paper, we investigate the role of royalty payments in the trading market with creators and buyers and explore how NFT platforms should design royalty policies to balance the incentives of both sides. We present three key findings. First, royalty payments can harm NFT creators and the overall market efficiency when creators and buyers hold symmetric information about the artwork's future value. Second, when information asymmetry exists with creators possessing more information about the value of the artwork, we demonstrate that royalty payments can enhance market efficiency by retaining high-quality NFT creators while excluding low-quality ones. Third, when the platform allows creators to commit to a royalty rate, creators may differentiate themselves based on their NFTs' quality, with low-quality creators setting higher prices and lower royalty rates, and high-quality creators opting for lower prices and higher royalty rates. Our findings shed light on how royalty payments can influence the welfare of different players in an NFT market, and the insights can also apply to the traditional art market.

Keywords: NFT; art market; platform design; royalty fee