Updated: September 12, 2025

Key Points

• NFT model: The NFT royalty model represents a hybrid structure: it resembles the ownership model by enabling the owner to independently determine their market strategy and set royalty fees, while also reflecting aspects of the leasing model by transferring certain management rights to third-party market participants.

• Two other models: In contrast to the NFT royalty model, the classical royalty model delegates both ownership and management rights to a centralized third party, whereas the full ownership model entails that the owner retains both control and responsibility for managing the good.

• Key differentiator: The primary distinction among these three models lies in the allocation of benefits and costs; the distribution of these factors ultimately determines the relative profitability of each model.

• Role of managerial costs: Intangible managerial costs, which are not explicitly accounted for in existing models, play a critical role in model selection and exert a determining influence on the economic outcomes for the artist.

Introduction

The "NFT fever" caught the attention of a lot of minds. There are numerous academic studies, ranging from qualitative works that attempt to identify behavioral patterns of NFT consumers (e.g., Mertel and Voigt, 2024) to financial analyses of the secondary prices of NFTs and NFT wash trading (e.g., Falk et al., 2023; Oh et al., 2022). 

I first turned my attention to the traceable markets in 2018, when the paper drew my attention to the logistics of the product returns. The intuition was that the unbundling of the physical product and the digital token representation allows for generating sales and liquidity without the need to move the actual physical product. The pivotal moment for the model framing was the encounter with Bulow's (1982) paper discussing the fundamental problem of the durable-goods monopolists. The realization that non-fungible tokens help connect the two markets, primary and secondary, kept spinning in my head and provoked a ton of research on the topics of electronic marketplaces, royalty contracts, and primary market pricing in the presence of strategic investors. 

It was not until recently that listening to the stories of music artists helped me realize the conceptual picture of the trading models and the differences in strategic decisions between them. This blog post will be devoted to it.

Model I - Classical Royalties Model (Principal–Agent)

The classical model of royalties can be understood as a principal–agent arrangement. The principal-agent framework, as traditionally defined in economic and organizational theory, describes a relationship where the principal delegates tasks to the agent, who acts on the principal’s behalf. The recording label, as principal, provides capital, marketing, and distribution infrastructure, while the artist, as agent, supplies creative labor. In exchange for funding and managerial oversight, the label retains ownership rights over the master recordings and dictates royalty terms.

For example, in standard recording contracts, artists often receive royalties ranging between 10–20% of revenues, but these are typically “net of costs” — meaning that expenses such as studio fees, marketing campaigns, and tour support are first recouped by the label. This explains why many musicians, even with successful albums, have historically earned relatively modest returns.

Artists with high bargaining power, however, deviate from this model. Taylor Swift’s recent re-recordings of her albums (“Taylor’s Versions”) illustrate how reclaiming ownership rights can shift the balance of power. Similarly, Jay-Z founding Roc Nation demonstrates how entrepreneurial musicians can invert the classical principal–agent hierarchy by becoming principals themselves.

Model II - Centralized Ownership Model (Renting)

A different model emerges when the creator retains ownership over their creative assets and instead rents out usage rights. In this schema, the artist becomes the principal actor in price-setting. They determine licensing fees, negotiate directly with platforms, and dynamically adjust terms over time.

This model is especially visible in the independent music scene and in creative industries such as photography and visual arts. For instance, photographers who license their images through platforms like Getty or directly to clients retain ownership but monetize through time-bound or usage-specific rental contracts. Similarly, Chance the Rapper’s strategy of maintaining ownership and distributing his music independently through streaming and live performance revenues illustrates the potential of this approach.

Here, the key generator of value is the ownership right itself. By retaining control, creators gain pricing flexibility and strategic autonomy. However, the trade-off is that creators must also shoulder the costs of promotion, distribution, and audience-building.

Model III - NFT Royalties Model (Leasing)

NFTs (non-fungible tokens) introduce a novel twist to the royalties debate. Artists who mint their work as NFTs retain ownership of the digital token metadata, yet they often forgo control over the secondary market price. Instead, they predefine a royalty percentage (commonly between 5–10%) that accrues automatically whenever the NFT is resold.

This leasing model has been prominent in the visual arts NFT boom. For instance, digital artist Beeple, whose NFT “Everydays: The First 5000 Days” sold for $69 million at Christie’s, also benefits from secondary market royalties as the work continues to circulate. Unlike traditional contracts, this model embeds royalties directly into the blockchain’s transaction protocol.

However, the model is not without tensions. Recent changes on major NFT marketplaces such as OpenSea, where royalty enforcement has weakened, show how fragile this mechanism can be when not universally respected. Thus, while NFTs introduced programmability into royalties, they also revealed new governance challenges: who enforces rules in decentralized markets?

Comparative Perspective

Across the three models, three control points emerge as crucial:

1. Primary price (who sets the initial value of the work).

2. Secondary price (how resale or rental value is determined).

3. Royalty percentage (what ongoing share of value accrues to the creator).

In the classical royalty model, control largely rests with the label (principal). In the centralized ownership model, creators reclaim autonomy but assume higher costs. In the NFT leasing model, creators gain automated royalties but lose control over dynamic pricing and the future value of their asset.

From a broader academic standpoint, these models reflect shifting balances between capital (labels, platforms, collectors) and labor (creators). The rise of NFTs highlights a new possibility: embedding rules of value distribution directly into technology. Yet, it also underscores the persistent importance of institutions — legal, managerial, or technological — in shaping how royalties actually function in practice.

References:

1. Bulow, J. I. (1982). Durable-Goods Monopolists. Journal of Political Economy, 90(2), 314-332.

2. Falk, B. H., Tsoukalas, G., & Zhang, N. (2023). NFT Wash Trading: Direct vs. Indirect Estimation. arXiv preprint arXiv:2311.18717.

3. Mertel, M., & Voigt, K.-I. (2024). A configurational approach to understand consumer NFT adoption. In Proceedings of the Blockchain Kaigi 2024. Zurich, CH.

4. Oh, S., Rosen, S., & Zhang, A. (2022). Investor experience matters: Evidence from generative art collections on the blockchain. SSRN Electronic Journal. 

Please cite this article as: 

Petryk, M. (2025, September 12). NFT Royalties Decoded: Why Managerial Costs Matter More Than You Think . MariiaPetryk.com. https://www.mariiapetryk.com/blog/post-22