Impact of resale royalty on primary and secondary sale prices in the non-fungible token marketplace

Abstract

Startups adopt non-fungible token (NFT) standard on Ethereum network and create marketplaces for collectible assets, trading cards and digital art. NFTs minted on blockchain must be paid a gas fee to miners at delivery. Due to increased traffic on Ethereum blockchain network, the constant upsurge in cost of minting bear hard on monetary security of token creators. As a potential cure for ever-rising minting cost, NFT platform managers adopt resale royalty which is a practice that transfers a fixed percentage of future sale amount to the creator of digital good. The adoption of resale royalty is seemingly beneficial for token creators as it provides a recurrent cash flow. However, it may have unintended consequences on the sale prices, which, in turn, affects the commission revenue for the platforms. In this paper, we develop several hypotheses for the impact of resale royalty on average sale prices on the primary and secondary markets. We leverage a panel dataset from a popular NFT marketplace and test our hypotheses using instrumental variables estimation. We find that the resale royalty leads to a significant decrease in the average primary sale price. We also find evidence that the average secondary sale price significantly increases with resale royalty. Our estimations suggest that token creators benefit from NFTs with resale royalty only after they are sold on the secondary market numerous times. Contrary to the conventional wisdom, re-sellers are better off when they make investments to NFTs with resale royalty even after adjusting for the royalty premium. We argue the managerial implications of the adoption of resale royalty for platform managers, token creators and re-sellers.