UCL School of Management is delighted to welcome Pavel Kireyev, INSEAD, to host a research seminar discussing: ‘Nonfungible tokens: how to match supply with demand in the metaverse’.
Recently many organizations such as Formula One, the Hermitage Museum, and the NBA, started issuing digital collectibles (NFTs, or nonfungible tokens) on blockchain-enabled marketplaces. Although the sales volume of digital collectibles surged to 25bn USD in 2021, the design of supply policies in these markets is poorly understood. The novelty of digital collectibles is that the marketplace owner can affect the market supply almost instantaneously by issuing new assets using different mechanisms like token sales and airdrops, with the aim of encouraging marketplace activity and increasing revenues. We analyze data containing two years of transactions on the “metaverse” platform Decentraland, in which participants can buy and sell virtual land NFTs. We build a structural model of supply, demand, and price formation, highlighting a trade-off between transaction frequency and market prices that is influenced by supply policies and affects platform revenues. We use counterfactual analysis to study the impact of important supply-related policies in the NFT context: token sales, airdrops (giving participants NFTs for free), and token burns (purchasing and destroying NFTs). We find that the revenue of the marketplace is non-linear with respect to the number of assets introduced in the market through token sales or airdrops, even if the minting cost (marginal cost of producing new NFTs) is zero. As a result, marketplaces should be cautious when implementing these policies to stimulate activity in the market. Furthermore, airdrops and token burns are unlikely to be effective in these markets even with very small minting costs. We also show that customers’ incentives to buy and resell should be taken into account when the firm considers introducing new assets into the market. Our framework is one of the first to explore supply policies in NFT markets and can be used by marketplaces to measure the potential effects of adjusting supply on activity and platform revenues.