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arxiv: 2212.00292 · v2 · submitted 2022-12-01 · 💰 econ.GN · cs.CR· cs.MA· q-fin.EC· q-fin.TR

Economics of NFTs: The Value of Creator Royalties

Brett Hemenway Falk , Gerry Tsoukalas , Niuniu Zhang This is my paper

Pith reviewed 2026-05-24 10:04 UTC · model grok-4.3

classification 💰 econ.GN cs.CRcs.MAq-fin.ECq-fin.TR
keywords NFTscreator royaltiesspeculatorsrisk sharinginformation asymmetryprice discriminationdigital marketssecondary sales
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The pith

Royalties on NFTs allow creators to benefit from speculators through risk sharing, information asymmetry mitigation, and price discrimination under realistic market conditions.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

Critics argue that NFT royalties have no net effect because sophisticated speculators simply price them into initial purchases. The paper shows this neutralization holds only in perfect, frictionless markets. Under realistic conditions with risk aversion, speculators who are better informed, or opportunities for multiple-unit sales, royalties instead let creators share risks, overcome information problems, and discriminate prices across buyers. In each case the mechanism also increases overall trade volume. Readers care because the result explains why royalties persist in practice and predicts higher platform activity when these features are present.

Core claim

Under more realistic market conditions, royalties enable creators to capitalize on the presence of 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). Moreover, in all three cases, royalties meaningfully expand trade, implying increased transaction volume for platforms.

What carries the argument

Economic models of secondary NFT markets that incorporate risk-averse participants, asymmetric information between creators and speculators, and multi-unit demand to derive equilibrium effects of royalties on prices and quantities.

If this is right

  • Royalties increase transaction volume for platforms across all three modeled scenarios.
  • Creators extract value from speculator participation rather than seeing it neutralized.
  • The zero net impact of royalties occurs only when markets are perfectly frictionless.
  • The three mechanisms generate testable predictions for empirical work on NFT data.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • The same logic could apply to royalties or resale rights in other creator markets with speculators, such as digital collectibles outside blockchain.
  • Platform designers could adjust royalty rates to target the specific friction present in their user base.
  • Removing royalties might reduce overall market activity if the identified frictions are material.

Load-bearing premise

NFT markets contain risk aversion, information asymmetries between speculators and creators, or multi-unit sales opportunities.

What would settle it

An empirical study of NFT platforms that finds no increase in trade volume or creator revenue when royalties are introduced or maintained in markets where risk aversion, information differences, or repeated sales are observable.

Figures

Figures reproduced from arXiv: 2212.00292 by Brett Hemenway Falk, Gerry Tsoukalas, Niuniu Zhang.

Figure 1
Figure 1. Figure 1: The region of trade unlocked by royalties under risk aversion, in [PITH_FULL_IMAGE:figures/full_fig_p011_1.png] view at source ↗
Figure 2
Figure 2. Figure 2: Creator revenues from Example 2 (with vL = 1, vH = 3) as a function of mint price p0. When the speculator is better-informed, the creator cannot extract the maximum expected revenue E[V ] = 2 without royalties. 12 [PITH_FULL_IMAGE:figures/full_fig_p012_2.png] view at source ↗
Figure 3
Figure 3. Figure 3: Creator revenue with optimal, p0, r compared to that without royalties (optimal p0 when r = 0). 14 [PITH_FULL_IMAGE:figures/full_fig_p014_3.png] view at source ↗
Figure 4
Figure 4. Figure 4: The region of trade unlocked by royalties under information asymmetry, in [PITH_FULL_IMAGE:figures/full_fig_p015_4.png] view at source ↗
Figure 5
Figure 5. Figure 5: Creator revenues from Lemma 5 (with λ = 1) as a function of mint price p0, when the creator has 2 NFTs to sell. The optimal mint price in each case corresponds to the peak point. Royalties Expand Trade for NFT Collections As was the case in Sections 4 and 5, by increasing creator utility, royalties also expand the space of parameters in which trade occurs between creator and speculator. Let T be the set of… view at source ↗
Figure 6
Figure 6. Figure 6: The region of trade unlocked by royalties when selling NFT Collections, in [PITH_FULL_IMAGE:figures/full_fig_p019_6.png] view at source ↗
read the original abstract

Non-Fungible Tokens (NFTs) are transforming 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 sophisticated speculators, who dominate NFT markets, simply price in royalties upfront, neutralizing their impact. We show this intuition holds only under perfect, frictionless markets. Under more realistic market conditions, royalties enable creators to capitalize on the presence of 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). Moreover, in all three cases, royalties meaningfully expand trade, implying increased transaction volume for platforms. These results offer testable predictions that can guide both empirical research and platform design.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

2 major / 1 minor

Summary. The paper develops three theoretical models showing that NFT creator royalties, which critics claim are neutralized by speculators pricing them in, generate value for creators under realistic frictions: risk sharing when agents are risk averse, mitigation of information asymmetry when speculators are better informed, and price discrimination in multi-unit sales. In each case the models predict that royalties expand trade volume relative to the zero-royalty benchmark.

Significance. If the derivations hold, the work supplies a coherent theoretical counter to the frictionless-market critique of royalties and generates testable predictions for empirical NFT research and platform design. The use of standard market-friction mechanisms (risk aversion, asymmetric information, multi-unit monopoly pricing) is a strength.

major comments (2)
  1. [Abstract and concluding discussion] The central claim that royalties 'meaningfully expand trade' under 'more realistic market conditions' is load-bearing on the empirical relevance of the three frictions; the manuscript supplies no calibration, survey evidence, or reduced-form test establishing that risk aversion, speculator-creator information gaps, or repeated multi-unit sales are first-order in observed NFT transaction data (see abstract and concluding section).
  2. [Models 1–3 (risk-sharing, information, and multi-unit sections)] Each of the three mechanisms reverts exactly to the zero-impact benchmark once its required friction is removed; without quantitative assessment of friction magnitudes, the policy implication that royalties are welfare-improving for creators remains conditional rather than general.
minor comments (1)
  1. Notation for the royalty rate and the speculator's information structure could be unified across the three models to improve readability.

Simulated Author's Rebuttal

2 responses · 0 unresolved

We thank the referee for the careful reading and insightful comments. The manuscript is a theoretical analysis identifying mechanisms by which creator royalties can generate value when standard market frictions are present. We address each major comment below.

read point-by-point responses

  1. Referee: [Abstract and concluding discussion] The central claim that royalties 'meaningfully expand trade' under 'more realistic market conditions' is load-bearing on the empirical relevance of the three frictions; the manuscript supplies no calibration, survey evidence, or reduced-form test establishing that risk aversion, speculator-creator information gaps, or repeated multi-unit sales are first-order in observed NFT transaction data (see abstract and concluding section).

    Authors: The paper is explicitly theoretical. Its contribution is to demonstrate that the frictionless neutralization result does not hold once risk aversion, asymmetric information, or multi-unit monopoly pricing are introduced, and that each friction generates both creator value and expanded trade volume. The abstract already states that the results 'offer testable predictions that can guide both empirical research and platform design.' We do not claim to have calibrated the frictions or provided reduced-form evidence; that is outside the scope of the current manuscript. revision: no

  2. Referee: [Models 1–3 (risk-sharing, information, and multi-unit sections)] Each of the three mechanisms reverts exactly to the zero-impact benchmark once its required friction is removed; without quantitative assessment of friction magnitudes, the policy implication that royalties are welfare-improving for creators remains conditional rather than general.

    Authors: This is correct: each model recovers the zero-royalty outcome when its friction is shut down. The manuscript's central point is precisely that the neutralization critique relies on the absence of these frictions. We argue that risk aversion, information asymmetry between creators and speculators, and repeated multi-unit sales are realistic features of NFT markets, but we do not assert that royalties are unconditionally welfare-improving. The policy takeaway is that royalties can expand trade and benefit creators once any of the three frictions is present. We are willing to add an explicit sentence in the conclusion underscoring the conditional nature of the results. revision: partial

Circularity Check

0 steps flagged

No circularity: theoretical models derive royalty benefits from standard frictions without self-referential reduction

full rationale

The paper presents three separate theoretical models showing that royalties expand trade under risk aversion, information asymmetry, or multi-unit sales. These are standard economic mechanisms applied to NFT settings; the derivations do not reduce to fitted parameters, self-citations, or definitions that presuppose the result. The abstract and provided text contain no equations or claims that rename inputs as predictions or import uniqueness via author citations. The results are explicitly conditional on the presence of the named frictions, which is an assumption rather than a circular construction. This is the normal case of a self-contained theoretical contribution.

Axiom & Free-Parameter Ledger

0 free parameters · 3 axioms · 0 invented entities

The central claim depends on three domain assumptions about market participants and settings; no free parameters or new entities are introduced in the abstract.

axioms (3)
  • domain assumption Market participants (creators and speculators) exhibit risk aversion
    Required for the risk-sharing channel to operate
  • domain assumption Speculators possess superior information relative to creators in some trades
    Required for the information-asymmetry mitigation channel
  • domain assumption Multi-unit sales opportunities exist for creators
    Required for the price-discrimination channel

pith-pipeline@v0.9.0 · 5694 in / 1358 out tokens · 25922 ms · 2026-05-24T10:04:50.973389+00:00 · methodology

discussion (0)

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Reference graph

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