Value Accumulation Case Study: How Yuga Labs Built a Massive Business Empire?

Written by: Vader Research

Compiled by: Deep Tide TechFlow

Value accrual is a crucial yet often overlooked topic in Web3. In this article, we will delve into how the value generated within the Yuga ecosystem is distributed among different stakeholders (Yuga Labs, $APE, BAYC, MAYC, etc.).

1. Capital Structure and Enterprise Value

In Web2 companies, capital structure typically consists of equity and different tiers of debt. Senior creditors usually have higher collateral security but charge lower interest rates, while subordinated creditors hold less secure collateral but charge higher interest rates.

Enterprise value is like a price tag for a company. It tells us how much the company is worth in total, including what it owes to others (like banks) and what belongs to the owners (like shareholders).

Enterprise Value = Equity Value + Debt Value

Creditors and minority equity shareholders have legal rights to the company's earnings and assets. In contrast, NFT and token holders do not enjoy such protections. Nevertheless, by incorporating the tokens and NFTs issued by Web3 companies as part of the overall capital structure, we can enhance the design and structure of value appreciation.

Using the same logic, the value of the Yuga ecosystem equals the total value of the entire Yuga world. It is the sum of the funds owned by the equity entity of Yuga Labs and the value of all existing NFT collections (BAYC, MAYC, etc.) and tokens ($APE).

Yuga Ecosystem Value = Yuga Labs Equity Value + Value of Yuga NFTs and Tokens

2. Intrinsic Value

Intrinsic value refers to the future value of an asset, which we can estimate based on future profitability. However, since future money is worth less than present money, we discount future earnings.

Thus, the fundamental value of a company, token, or NFT equals the discounted value of its future earnings. Similarly, the value of the Yuga ecosystem also equals the discounted value of its future earnings.

Yuga Ecosystem Value = Discounted Future Earnings

3. What is YUGA's Business Model?

How does the Yuga ecosystem generate revenue? Let's take a look at the primary revenue sources of the Yuga ecosystem.

Yuga has two main revenue channels:

• NFT and Token Sales → Creating and selling new tokens and NFT collections;

• NFT Royalties → Charging a fee on each secondary NFT transaction.

4. The Dark Side of Issuing New NFTs: Dilution

The Yuga ecosystem has gained significant revenue by creating and selling new NFT collections, such as BAYC, MAYC, and Otherdeeds. Yuga Labs earned $100 million from the initial sale of MAYC and $330 million from the initial sale of Otherdeeds, while holding over $2 billion in Ape Coin and $40 million in Otherdeeds on its balance sheet.

However, releasing new NFT collections also has its downsides: it dilutes the ownership of existing Yuga ecosystem shareholders (Yuga Labs, APE, BAYC). For existing Yuga ecosystem shareholders to benefit from dilution, they need to offset the dilution cost with the value created by issuing and selling new NFT collections.

This idea is similar to the concept of mergers and acquisitions (M&As), where the acquiring company acquires the target company through a share exchange. Thus, shareholders of the acquiring company will experience dilution. The success of the acquisition depends on whether the value created by the target company exceeds the dilution cost. If the created value is greater, the acquisition is considered successful; otherwise, it is deemed a failure.

5. BAYC Sale | May 2021

When Yuga Labs issued and sold 10K BAYC at a price of $200 each, they created a new stakeholder group called BAYC holders, earning $2 million from the initial sale.

It is important to note that PFP projects and Web3 game studios sell NFTs not just as virtual goods; people purchase them with the expectation that their value will grow over time.

This is why BAYC owners are seen as an independent stakeholder group within the Yuga ecosystem, as the issuing company has responsibilities towards these NFT owners.

In the months following the sale, the price of BAYC significantly increased, reaching $66,000 by the end of August.

This means that the market value of BAYC could be as high as $660 million, and if we assume a 1:1 conversion rate between the market cap of BAYC and the valuation of Yuga Labs' equity entity, then Yuga Labs' valuation would also reach approximately $660 million.

The analysis of the above Machinations chart is as follows:

• Yuga Labs sold 10,000 BAYC, raising $2 million.

• Within 4 months, the price of BAYC rose from $200 to $66,000.

• By the 4th month, Yuga Labs had already earned $2.5 million from BAYC royalty income.

6. MAYC Sale | August 2021

Next, let's analyze the issuance and sale of MAYC. Before MAYC was launched, the market cap of BAYC was approximately $660 million, and the entire ecosystem consisted solely of BAYC holders and the four founders owning Yuga Labs.

Additionally, a total of 20,000 MAYC NFTs were created, with 10,000 sold to the public and another 10,000 allocated to BAYC holders. This means that Yuga Labs and BAYC each received 50% of the MAYC issuance revenue.

Unlike other PFP NFT series, BAYC holders could claim future Yuga NFTs for free. This conveyed a clear message to BAYC holders that they hold a crucial position in the Yuga ecosystem.

Yuga Labs successfully sold 10,000 MAYC NFTs at a price of $10,000 each, earning $10 million. The 10,000 MAYC NFTs given to BAYC holders theoretically valued $10 million at the end of the MAYC sale.

At the time of the MAYC issuance, there were some concerns that could affect it. First, there was uncertainty about whether Yuga Labs could sell all 10k MAYC NFTs. Second, there were worries that selling new collectibles (MAYC) would dilute the value of BAYC, leading to a decrease in BAYC NFT prices due to increased competition.

However, despite these concerns, the sale of MAYC was a tremendous success for Yuga Labs, generating $10 million in revenue and paving the way for future NFT products.

Let's analyze the above Machinations chart:

• Yuga Labs sold 10,000 MAYC for $100 million.

• The price of MAYC rose from $10,000 to $58,000 within 7 months.

• By the seventh month, Yuga Labs had generated $25 million in royalties from MAYC.

In the weeks leading up to the launch of ApeCoin, the trading price of BAYC reached $2.2 billion, while the trading price of MAYC was $1.1 billion. Yuga launched new NFT collections, creating significant new value and attracting well-funded late-stage crypto venture capitalists.

Yuga, led by a16z, raised an astonishing $450 million in seed funding at a valuation of $4.5 billion, which would be made public a few weeks after the launch of ApeCoin. If we do not consider the 1:1 NFT market cap and equity rule, but instead adopt the seed round valuation, the value accrual structure would look as follows.

7. $APE Launch | March 2022

The launch of ApeCoin in March 2022 was a significant event in the Yuga ecosystem and received high attention from the NFT community. Yuga Labs had achieved multiple successful launches in the blockchain space, so many were eagerly anticipating the launch of ApeCoin, hoping it would meet the high standards set by Yuga Labs.

The initial token distribution was designed to allocate 47% of the tokens to the ecosystem, 15% to Yuga Labs, 1% to charity, 8% to founders, 14% to venture capital, and 15% to BAYC and MAYC holders.

Our definition of Yuga ecosystem stakeholders (Yuga Labs, BAYC, MAYC, VCs) allocated a total of 52% of the tokens. Let's take a look at the distribution of this 52%:

While the aforementioned numbers provide some insights, they do not fully reflect the actual situation. It is important to note that Yuga Labs' venture capitalists and founders also have fundamental interests in Yuga Labs, meaning they indirectly receive more tokens than the previously mentioned numbers suggest. Therefore, it is necessary to further analyze these numbers to obtain a more accurate token distribution.

Assuming no employees or advisors own any stake in Yuga Labs, and we also exclude the potential equity dilution from the acquisition of Larva Labs (CryptoPunks IP). Based on the $450 million seed round funding, it appears that the founders of Yuga Labs own 89% of the company, while the venture capitalists own the remaining 11%. When we total these numbers, it means that the token distribution for Yuga Labs founders is 41%, and the token distribution for Yuga Labs venture capitalists is 30%.

Since the distribution of $APE Coin differs significantly from MAYC, the distribution of $APE Coin is more favorable to Yuga Labs' shareholders rather than to BAYC and MAYC holders.

Our calculations indicate that Yuga Labs and its shareholders received 71% of the allocation, while BAYC/MAYC holders received only 29%. This translates to a ratio of 2.4:1, which is higher than the 1:1 ratio of MAYC distribution. Therefore, a16z and the founders of Yuga Labs sacrificed BAYC and MAYC holders while receiving a larger allocation of $APE Coin.

It is worth noting that the tokens allocated to BAYC and MAYC holders are immediately usable, while the tokens allocated to Yuga Labs, VCs, and founders are subject to a 4-year lock-up period.

8. OTHERDEEDS Sale | May 2022

In the days leading up to the Otherdeeds sale, the trading prices of Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), and $APE tokens all reached all-time highs.

BAYC had an astonishing market cap of approximately $4 billion, MAYC reached about $2 billion, while the market cap of $APE tokens was $6.5 billion. In less than two years, Yuga Labs successfully transformed ten thousand utility-less monkey JPEGs into a multi-billion dollar empire!

It is important to note that the market cap of NFT collectibles is calculated based on the floor price multiplied by the circulating supply, so if someone wanted to buy all circulating Yuga ecosystem assets at once, the actual valuation could be much lower.

Of the total 100,000 Otherdeeds issued, 55,000 were sold publicly, 10,000 were given to BAYC, 20,000 were given to MAYC, and 15,000 were reserved by Yuga Labs.

Overall, 70% of Otherdeeds were allocated to Yuga Labs. We see another scenario where Yuga Labs acquired assets from NFT and $APE token holders at inflated prices. Additionally, MAYC holders received excessive allocations at the expense of BAYC holders, while $APE holders received no allocation of Otherdeeds.

Let's analyze:

• Yuga Labs sold 55,000 Otherdeeds NFTs for $310 million. Using this $310 million purchasing power to buy Otherdeeds NFTs, Yuga Labs promised not to touch the $APE earnings for a year. Therefore, the $APE earnings generated from Yuga's Otherdeeds sale currently value approximately $80 million.

• The price of Otherdeeds fell from $31,000 to $2,000 over 7 months.

• By the 7th month, Yuga Labs had generated $56 million in Otherdeeds royalties.

While we previously stated that APE holders did not receive any Otherdeeds allocation, it is important to note that the primary sales were conducted using $APE. However, using APE as a medium of exchange to purchase Otherdeeds assets at auction does not necessarily confer value to $APE or make it a sustainable aggregation point.

Only if $16 million of $APE is deposited by Otherdeeds purchasers into the $APE DAO treasury will the value permanently accrue to $APE. If that is the case, the surplus $APE held in the treasury will be collectively voted on by the APE governance team to decide how to utilize it—because it will remain on the balance sheet of the APE DAO.

In this hypothetical chart, we can observe several events occurring. Each month, 5 million APE tokens enter circulation through scheduled token unlocks and staking rewards. Additionally, we can see that 1,000 APE tokens are transferred back to the $APE reserve each month through the sale of Sewer Pass IAPs in Yuga's mobile game (which we will discuss shortly).

As more tokens accumulate in the reserve, the value of $APE theoretically increases. However, if the tokens are not accumulating in the treasury but are being staked, this will only delay the inevitable—Yuga Labs selling their own token allocation.

Regarding the sale of Otherdeeds, it is important to note that the $APE paid by purchasers went directly into Yuga Labs' wallet, not into the APE DAO treasury. This means Yuga Labs has complete control over these tokens and can sell them at any time, distributing the proceeds to its shareholders. However, Yuga Labs has committed not to sell the $APE tokens obtained from the Otherdeeds sale for a year.

In reality, Yuga Labs has locked the $APE tokens for a year to some extent, but they are likely to sell a portion of them at the end of the year. This leads to the $APE tokens becoming a scarce resource within the year, but in fact, the tokens obtained from the Otherdeeds sale remain under Yuga Labs' control.

In this hypothetical chart, we demonstrate a scenario where Yuga Labs regularly sells 5 million $APE, and the proceeds from the Otherdeeds sale only temporarily alleviated the selling pressure on $APE.

9. SEWER PASS Launch | January 2023

Before the launch of Sewer Pass, the value of Yuga's assets was declining along with the overall cryptocurrency market. Specifically, the value of the Yuga ecosystem dropped from $17 billion in May 2022 to $3.8 billion in January 2023.

Now let's analyze the structure of the Sewer Pass issuance.

Here is the capital structure of the Yuga ecosystem as of March 2023:

• Yuga Labs: Owns NFTs, games, and other assets

• Bored Ape Yacht Club (BAYC): Holds Sewer Pass NFTs

• Mutant Ape Yacht Club (MAYC): Holds Sewer Pass NFTs

• APE DAO: Owns APE tokens and Otherdeeds NFTs, controlled by APE token holders

Among them, Sewer Pass NFTs are considered a bridge connecting the BAYC and MAYC communities with Yuga Labs. However, since Yuga Labs does not hold any Sewer Pass NFTs itself, the value of this NFT collection is not included in Yuga Labs' total assets. At the same time, while in-game microtransactions can be purchased using APE tokens, their revenue scale is negligible compared to Sewer Pass NFTs.

10. YUGA Ecosystem Revenue

The table shows the revenue generated by Yuga Labs, BAYC, and MAYC from the issuance and sale of Yuga NFTs and tokens. Although the revenue for BAYC and MAYC holders appears higher, at $1.3 billion and $572 million respectively, Yuga Labs' revenue is $412 million, excluding the tokens and NFTs held in its reserves. Notably, Yuga Labs holds $2 billion in $APE Coin in its reserves.

Royalties have become an important revenue source for NFT projects, although their viability is challenged by ongoing competition in the NFT market.

Yuga Labs charges a 2.5% fee for BAYC and MAYC, while they charge 5% for Otherdeeds and Sewer Passes. It is worth noting that all earned royalties flow to Yuga Labs, with no allocation to other stakeholders in the Yuga ecosystem. Therefore, Yuga Labs has accumulated $182 million in revenue from royalties.

Compared to primary sales, royalty income is much lower. As we previously assumed, primary sales are a superior mechanism for monetizing intellectual property. However, royalties can serve as a supplementary income stream, providing additional revenue sources.

11. Stakeholder Issues

One of the biggest challenges when dealing with multiple holders is the inconsistency of interests. Due to the lack of legal or predetermined smart contracts specifying who is entitled to what, each holder may strive to maximize their short-term gains. At some point, internal conflicts may arise among multiple stakeholders as everyone tries to aggregate value into their assets.

To avoid this situation, Yuga Labs must take responsibility for managing multiple stakeholders and manage their interests in a relatively fair manner when building new releases and creating new revenue channels. A well-designed structure should aim to maximize collaboration among all stakeholders and minimize instances of conflicting interests.

Considerations:

• If Yuga launches a new series tomorrow, how will the company allocate that series to its stakeholders?

• If Sewer Pass holders do not receive any airdrops, what value or utility does the Sewer Pass have? Why would anyone continue to hold their Sewer Pass? Why wouldn't they sell it? This question also applies to Otherdeeds.

• What percentage of game/metaverse revenue will be shared with Yuga's stakeholders? Will BAYC/MAYC holders receive any share of the game revenue?

• If game revenue is only allocated to $APE and Otherdeeds holders, what will the distribution be? 50/50? 80/20? Will the distribution be based on recent market prices or primary sale prices?

Let's consider this from the perspective of retail investors. If someone wants to invest in the Yuga ecosystem, which asset should they buy?

This question is very important because each asset offers different revenue channels for investors to gain returns within the Yuga ecosystem. If Yuga performs well in the future but the asset purchased by the investor underperforms compared to other Yuga assets, it will be very disappointing for the investor.

Buying BAYC and MAYC has a compelling value proposition. By owning these assets, investors can receive a proportional reward for each new Yuga NFT or token issuance. Even if Yuga sometimes allocates fewer rewards to BAYC and MAYC holders, they can still receive a certain proportion from the issuance.

If you believe that Yuga's future NFT and token collections will hold value, then BAYC or MAYC is the asset to buy. However, you will not receive Yuga's royalty income. The minimum capital required to purchase these assets is relatively high, as the floor prices for BAYC and MAYC are over $110,000 and $20,000, respectively.

$APE Coin offers a different value proposition. Currently, $APE provides vague and superficial "empowerment," without explaining how the Yuga ecosystem will accumulate value for $APE. While using $APE to purchase Otherdeeds provides temporary value, it merely delays the inevitable outcome. Once $APE token holders realize that the value created from the Yuga ecosystem will not accumulate to $APE, they have no reason not to sell it.

Using $APE for in-game microtransactions is a clearer utility (assuming the revenue goes into the $APE DAO treasury). We may see more $APE empowerment in Yuga's games/metaverse. However, Yuga has not announced the utility of existing assets. Delaying this announcement is actually a wise move on their part, as it leads to more speculation and anticipation among asset holders.

This means that if promises are not fulfilled, it could lead to dissatisfaction among asset holders. Even if Yuga develops excellent intellectual property, games, or metaverse experiences, if BAYC holders or Yuga Labs receive more revenue from them compared to $APE or Otherdeed holders, those holders will feel dissatisfied.

12. Conclusion

The value accrual structure is a challenging topic in the Web3 world. Each set of NFTs or tokens issued by a project becomes a liability in the project's Web3 capital structure. To ensure that all stakeholders remain aligned and collaborate effectively, projects need a carefully designed value accrual structure.

If you are an investor, it is crucial to conduct thorough due diligence to fully understand the revenue and value channels you will face. When you make mistakes in asset selection, even if you make the right decisions regarding the project and team you invest in, you may feel very disappointed.

In short, a well-structured value accrual model is essential for the success of Web3 projects, and investors should take the time to comprehensively understand the assets they are investing in to avoid future disappointments.