Resale royalties may be a money loser for artists selling NFTs: study

In recent years artists from around the globe have turned to non-fungible tokens, or NFTs, to sell their digital works, including songs, visual art, videos, photos and more — to the point where, by February 2023, cumulative NFT trade volumes had skyrocketed to $73 billion.

Some NFT platforms allow creators to apply resale royalties, which means the artists get paid every time the artwork changes hands. But according to new research from the UBC Sauder School of Business, those resale royalties might actually be taking a bite out of artists’ bottom lines. 

NFTs are unique digital assets that exist on a blockchain — a kind of networked electronic ledger — as opposed to fungible tokens which are identical and interchangeable, like cryptocurrencies. When resale royalties are applied, every time an artist’s artwork is resold they receive a percentage of the selling price; so if the artwork sells for $1,000, and the royalty is 10 percent, the artist would receive $100. (Other royalties are based only on the gain in value, as opposed to the total sale price.) 

For the study, titled Resale Royalty in Non-Fungible Token Marketplaces: Blessing or Burden for Creators and Platforms?, the researchers examined activity on the popular NFT marketplace Rarible. Using data that spanned three years from May 2020 to May 2023 and included over 4.7 million NFTs, they looked at how the cost of minting an NFT — that is, publishing an artwork on the blockchain so it can be purchased — affects the resale royalty rates that artists charge. They also looked at the link between the royalty rates and the average sales price of NFTs.

The researchers found that when artists set heftier royalties — which they often do when they have higher upfront minting costs — they tend to lower their sale prices, likely banking on the idea that higher royalty rates will compensate for the lower revenue on the initial sale. In fact, for every 1 per cent increase in the royalty rates there was a 4 per cent decrease in the sale price, on average.

But do the NFT resale royalties make up for those lower sales over the long run? The researchers accumulated all of royalty commissions that NFT artists made from 2020 to 2024 and found they don’t.

“All of those royalty commissions still don’t compensate for the initial decrease in prices,” says Tilburg University Assistant Professor Dr. Murat M. Tunç, joining an interview with UBC Sauder Professor and co-author Dr. Hasan Cavusoglu. A large part of the problem, he adds, is likely overconfidence. “NFT creators who have had success in the past and have more followers are the ones actually decreasing the prices on their sales. They overestimate their future income.”

At the same time, the research shows that buyers are less willing to invest in NFTs with higher royalties because they’ll be on the hook to pay that steeper percentage when they sell. 

“If you're investing in an NFT with a 20 per cent royalty rate, you're basically buying 80 per cent of the secondary sale value, versus if you're buying an NFT with a 5 per cent royalty — then you have 95 per cent as the reseller in the future,” explains Dr. Tunç. “The higher the royalty rate is, the lower the amount the buyer or the reseller will get in the future. So that doesn't create much value — and that’s why they’re less willing to invest.”

Interestingly, the researchers also found that when artists opted for “lazy minting” — that is, their work was automatically registered on the blockchain at no cost when it was sold — they are less likely to raise the royalty rates as much as those who pay for minting up front. 

Resale royalties are nothing new: in fact they’ve been around for more than a century, and were intended to compensate artists who begin as unknowns, but whose work becomes more sought after — and pricier — over time. 

Many studies have looked at the impact of resale royalty rates on artworks, which were introduced in France in the 1920s, but this study is the first of its kind to examine the impact of resale royalties on NFTs, which first appeared in 2014 and saw a feverish rise in 2021 before crashing back down in 2022.

Royalties can be positive in that they incentivize creation, says the researchers, but some artists get lured by the promise of higher royalty rates and become overconfident. Instead, they should work to better understand the broader NFT ecosystem before setting royalty rates, which can’t be changed once they’re in place — and if they alienate buyers, they’re not making any sale at all.

What’s more, Dr. Cavusoglu warns that if prices go lower, and sales are slower, platforms suffer too. “The sales will not be converted, they take longer and the prices are low,” he says. “What we get from the results is that platforms are not necessarily benefiting from this scheme, which is essentially allowing artists to set the resale royalties.”

Royalties can incentivize creation, says Dr. Cavusoglu, but artists and platforms may want to consider reining them in by applying an upper limit, creating a sliding scale — so the higher the sale price the lower the percentage rate — or apply royalties solely to profits rather than to the full sale price. 

“It’s a balance. If I ask for very, very high price, the chances are low of a sale. And if I lower the price, I might sell that, but there is the cost associated with it and it might not be profitable,” says Dr. Cavusoglu. “So there is a sweet spot that each artist will have to decide, but it is not just the sales price, but also the royalty rate because it will affect the subsequent sales.”

At the same time, the researchers — who also included Dr. Eric Zheng of the University of Texas at Dallas — say that stopping royalties altogether would be bad for artists, and would hurt the overall ecosystem, because that ecosystem depends on keeping a delicate balance between artists, platforms and buyers.

Interview language: English