Impact of resale royalty on sale prices and market liquidity in the NFT marketplace

Non-fungible token (NFT) marketplaces facilitate users to mint and trade digital assets such as collectibles, trading cards and digital artwork. To mint an NFT on the Ethereum blockchain, a creator must pay a substantial gas fee to miners at delivery, on average $300 at present. To protect creators and counter the heavy burden of the ever-rising minting cost, many NFT platforms adopt resale royalty which pays back the creator a certain percentage of future resale amount. 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 and liquidity of the underlying NFT, which, in turn, affects the commission revenue for the platforms. In this paper, we focus on understanding the impact of resale royalty on average sale prices both on the primary market (i.e., when the creator sells the token) and the secondary market (i.e., when a buyer resells the token). We leverage a panel dataset from a popular NFT marketplace and test our hypotheses using instrumental variables estimation. We find that a higher resale royalty rate leads to a significant decrease in the average primary sale price, however the average secondary sale price significantly increases. Contrary to the conventional wisdom, our estimations suggest resale royalty does not always benefit NFT creators. In particular, creators benefit from NFTs with resale royalty only after they are sold on the secondary market numerous times. Surprisingly, re-sellers are better off when they make investments to NFTs with resale royalty from the primary market, even after adjusting for the royalty premium. Furthermore, we provide empirical evidence that an increase in the cost to mint an NFT leads to a higher royalty rate set by the creators. Finally, we find that resale royalty has a negative influence on the liquidity of NFT marketplace, specifically success rate of a sale listing and the duration to sale. According to these results, resale royalty may have unintended consequences for platforms, and we discuss implications for platform managers, token creators and re-sellers.