ApeCoin plans to launch its own blockchain. What do Messari analysts think?

Author: Messari

Compiled by: The Way of DeFi

Summary

In light of the strong demand for BAYC land—Otherside NFTs, Yuga Labs has proposed that ApeCoin will require its own blockchain, layer two network/Subnet, or other sidechain solutions.

Messari analysts have examined the implications of the scaling solutions launched by Yuga Labs and their impact on the value accrual of other assets within the BAYC ecosystem.

The sale of BAYC land NFTs (Otherside) is one of the most significant ETH destruction events in recent history and an enduring achievement for the Bored Ape NFTs. From a demand perspective—considering the robust demand for BAYC land Otherside NFTs—Yuga Labs has suggested that ApeCoin will need its own blockchain, layer two network/Subnet, or other sidechain solutions. While Yuga Labs has not provided any further explicit information, they have begun encouraging the DAO to start thinking in this direction.

With the launch of Otherside NFTs, the total value of the BAYC brand has reached approximately $25 billion, or about 12% of Disney's market value.

Analysis of BAYC

This raises an important list of questions, some of which are top of mind for Messari analysts:

1. What are your thoughts on BAYC announcing its own blockchain?
2. What impact does this have on the value of the BAYC ecosystem?
3. Any other thoughts or opinions surrounding BAYC's strategy?

With no shortage of opinions, analysts at Messari have assessed the BAYC ecosystem based on these questions.

Mason Nystrom: Is it Disneyfication or cash grab?

The Disneyfication of NFTs is happening in real-time, but unlike Disney, its foundation is not built on love stories.

In the early career of Walt Disney, his animation studio was teetering on the brink of financial collapse, as the relatively successful animated films were all money losers. By the mid-1930s, animated films were expensive, and the demand for movies was severely impacted by the long-term unemployment caused by the Great Depression. One could say that the prospects for newly established animation studios were bleak, that is, until the release of "Snow White" catalyzed what we now know as the Disney empire.

NFTs are in a similar position, with early brands like Axie Infinity and BAYC trying to build economic empires on the profitability of NFT collections. Sky Mavis (the developer of Axie Infinity) effectively isolated the AXS token from the Axie world by launching the Ronin sidechain along with its own native asset RON. While Sky Mavis still has upcoming Axies, such as its own digital land sales, it is clear that Sky Mavis aims to strengthen its business model by creating vertical gaming infrastructure. Another well-known NFT game developer, Immutable Labs, has taken a similar approach by building its own layer two network (IMX) for its flagship trading card game Gods Unchained, while also launching the GODS token for the Gods Unchained ecosystem.

AXS has its defined utility within the Axie Infinity world, while ApeCoin does not have the same constraints, and launching some new chains (ApeChain?) may present opportunistic scenarios, even if Yuga is merely adopting the playbook of other competitors.

Given the limited utility of ApeCoin, the launch of a new chain provides an opportunity to add more value to ApeCoin, although Yuga Labs is more likely to launch another native token for their scaling solution (given that this is what all scaling solutions have done so far).

We are not arguing whether this is a necessary shift (there are pros and cons), but it is a shift that will meaningfully impact the value accumulation of valuable assets within the BAYC ecosystem. More specifically, given that Yuga Labs' recent $4 billion funding with partners like Animoca and a16z was equity-based rather than token-based, competitive incentives may begin to seep into the Yuga Labs team and its institutional investors.

BAYC has navigated the issuance blueprint well, releasing dog companions, mutant ape yacht clubs, and now BAYC land, all of which have performed quite well financially. However, the long-term value of these collectibles still hinges on their luxury status and potential airdrop rewards. Even the commercial viability of scarce digital land has yet to be proven.

If Yuga wants to create the Disney of Web3, they need capital and intellectual property that can sustainably generate cash flow. Yuga clearly has capital; while BAYC's transaction fees and NFT releases generate substantial returns, they are not necessarily recurring or sustainable. The future of Yuga Labs and the Bored Apes will depend on their ability to create a platform that consumers are willing to pay for or build a business based on valuable intellectual property.

Chase Devens: Sometimes less is more

The past half-century has seen no shortage of ambitious companies whose early successes led them to believe they could (and should) continue to grow at lightning speed. In just over a year, BAYC has permeated the global consciousness and embedded itself into the cultural bedrock of cryptocurrency. Its initial product (a community-based NFT that is also a PFP) was so successful that any subsequent iterations are almost impossible to achieve the same level of success.

Why has BAYC become so valuable? In my view, it was a perfect timing and adoption from high-profile individuals outside of cryptocurrency. The minting in late April 2021 was weeks ahead of the summer NFT explosion. When NFT prices truly took off, early BAYC whales like j1 mmyeth and Pranksy successfully promoted the project to the first wave of celebrity adopters like Steve Aoki and Josh Hart. As an outsider with little knowledge of NFTs, why would you do your own research if you could just follow the whales?

As more cultural attention shifted to the Bored Apes in 2021, the network effects of BAYC strengthened. Like any other fixed-supply NFT collection, the increase in demand drove prices higher and higher. Owners began organizing meetups with fellow Bored Apes in the physical world. Yuga Labs may have created the coveted cartoon images, but the community is responsible for driving its value.

When Yuga Labs chose to release a series related to BAYC, launch their own coin, and create virtual land, they unwittingly took a huge gamble on their brand positioning. As I detailed in a recent report, successful NFT series today resemble luxury brands and are likely to suffer the same threat of downward market brand dilution. Essentially, a mature brand attempting to create more products to cater to a larger audience may actually dilute the value of its existing assets. While the launches of Mutant Apes, Kennel Club, and ApeCoin have been hugely successful, the negative sentiment surrounding the launch of Otherside land may cause permanent damage to the original Bored Apes.

If you had asked me last week about the Bored Apes, I would have struggled to find any evidence against their being considered immortal. However, now there is a small crack appearing on their walls. Will this lead holders or potential buyers to reassess the brand's collective value of $25 billion?

We can let the market decide that. Right now, I am interested to see how Yuga Labs responds. Personally, I think it is still too early for brands to bet their success on potential metaverse games. As far as I know, the Bored Apes created FOMO by appearing on basketball courts and coffee bags. Why would people shift from physical world adoption to the virtual world when the metaverse is not yet ready for the masses?

Even if ApeChain becomes a reality, how many Bored Ape holders will be lost in the process of migrating from Ethereum? Bored Apes are notorious for having their Apes permanently stolen due to holders clicking on scam links. Such a migration could be said to target scammers at temporary holders.

The pace of cryptocurrency development is rapid, and it is easy to be swept away by the hype. While this is often advice given to newcomers, all actors must keep this in mind. If I were Yuga Labs, I would take a step back and reassess my priorities to maintain my position on the throne.

Tom Dumleavy: It's a bold strategy; let's see if it pays off

Why shouldn't the Bored Apes launch their own blockchain? What can Ethereum provide for BAYC? BAYC started on Ethereum because that was where NFTs began when they launched. NFTs are largely still an Ethereum story, but the Bored Apes ecosystem has surpassed the normal NFT status. If an NFT project were to launch today, there is nothing they couldn't do on Solana, Avalanche subnets, or their own chain that they could do on Ethereum.

BAYC is a brand, BAYC is a luxury, and BAYC is certainly recognized by your cousin and possibly by your mom and grandma. Leaving Ethereum does not change that.

In fact, we have seen branded NFTs exit traditional main chains and start their own chains. The most successful example that comes to mind is the Dapper Labs team and the Flow blockchain they created. The Dapper Labs team leveraged brands like the NBA, NFL, UFC, and others with which they have intellectual property partnerships to launch their own custom chain, and guess what? It worked better for their use case than Ethereum.

Here’s a question? Great, roll back the data on the chain. We are not solving decentralization issues. People have spent a lot of money on these, partly because they have confidence in the leadership's future vision.

Is something misplaced or sent to the wrong address? Great, a centralized entity can fix that.

Are existing brands worried about intellectual property infringement? No problem, Flow has partnered to ensure that their intellectual property partners are not abused on its blockchain.

Worried about the fees for your new metaverse? Forget it; the rules are set by you. Let’s put these puppies down on the ground.

For the planned BAYC metaverse, a new chain solves many existing problems.

The value accumulation of the ecosystem remains unchanged. For the Bored Ape ecosystem we are pulling together, there are essentially no marginal users. The few who want to join and can afford the price will seek ways to do so. Anyone wanting to trade in the Bored Ape ecosystem will need the Ape token, regardless of whether the token is on Ethereum. With a new chain, they won’t have to worry about gas fees.

The prominent downside is the ongoing development and maintenance of the new chain, but hey, Yuga Labs can afford it.

Kunal Goel: I’m not buying it (and I can’t afford it)

While following the path set by Dapper Labs and Sky Mavis seems tempting, in my view, it is too late to launch a copycat blockchain in 2022. While Yuga Labs has achieved tremendous success with its brand and NFTs, they have shown no skills to indicate they can build a new and better blockchain. Instead, the lack of gas optimization in the launch of Otherdeeds NFTs is a negative indicator. Perhaps intermediate solutions like Avalanche subnets or Polkadot parachains might work best. Nonetheless, they are unlikely to choose it, as BAYC may be as big a brand as these alternative platforms. The advantage of NFTs on public chains compared to database assets is that they are independently secure and composable; launching a new chain would negatively impact these attributes.

Exclusive NFTs have a built-in flywheel mechanism. They are Veblen goods that become more desirable and exclusive as prices rise. The launch of Otherdeed NFTs not only diluted exclusivity by increasing supply by 2.5 times, but the issues at launch may have even harmed the brand. Unfortunately, the flywheel spins both ways, and the prices of all assets owned by Yuga Labs have taken a hit.

Yuga Labs may still succeed. If they lack expertise in blockchain or game development, they have ways to acquire that knowledge. The Otherdeed NFT launch was a disaster simply because of how popular it was. Cryptocurrency investors often have short memories, and future successful launches may dilute past issues.