From Canvas to Blockchain: Impact of Royalties on Art Market Efficiency

Abstract

A non-fungible token (NFT) is a uniquely identified digital asset that utilizes blockchain technology for verification of ownership and authenticity. NFTs have revolutionized the art world by providing a secure and transparent way to authenticate and trade digital artworks. In contrast to the traditional art market, a distinctive feature of the NFT market is that artists are enabled to receive royalties each time their artwork is resold in a secondary market.
In this paper, we study the impact of NFT royalties on artists' pricing decisions and the overall efficiency of the art market. We find that if the popularity of artworks is publicly known in the market, royalties diminish the resale value of artworks. This leads to lower transaction volume in both the primary and resale markets, making all market participants worse off. If artists possess superior knowledge about the popularity of their artworks than buyers, a popular artist may set an inefficiently high price to signal his popularity. Royalties benefit the popular artist by mitigating the price distortion in the primary market, but still hurt the transaction volume in the resale markets. As a result, the popular artist's profit first increases and then decreases with the royalty rate, and there exists a unique positive royalty rate that maximizes his profit. The total social welfare may increase or decrease with royalties.

Keywords: NFT, Art Market, Blockchain, Royalty, Signaling Game