Bored Apes: The $2 Billion JPEG Cartel
Status monkeys, influencers, game theory and the making of an NFT Empire.
Welcome to the first issue of Charterless! Let's talk Bored Apes.
The Bored Apes are not a DAO. Though they announced a DAO to support their new token just yesterday. But the way they use incentives to achieve economic outcomes inspired many of the DAOs that I have researched. So we’re going to start with their story.
They also happen to be the most successful art project in human history. In the ~10 months since their launch, the 10,000 apes have generated a collective market cap greater than $2B. How did this happen? What can we learn about the future of DAOs from the BAYC?
Some Background on NFTs (Skip if you’re familiar with what they are…)
The first NFTs were created in 2014 on the Ethereum Blockchain.
Bitcoin has the computing power of a calculator so it allows a user to buy and sell only Bitcoins. But Ethereum is like a computer. It enables users to write their own programs and create new tokens for trading on its network. One such program is the NFT or Non-fungible token. NFTs differ from a typical token or coin in that they are unique. They often get compared to digital art, but it’s more accurate to think of them as an ownership deed representing the rights to a particular asset. That asset could be art, real estate or really anything.
In 2017, a few NFT projects like cryptokitties and cryptopunks broke through to popularity in the Ethereum community. Cryptopunk owners, in particular, began to set their images as Twitter profile picture as status symbols.
But when crypto prices dropped precipitously in 2018, the world stopped paying attention to NFTs.
Rise of the Apes
In 2020, the pandemic brought about a boom in Bitcoin and Ethereum prices. The surging prices reawakened interest in crypto from the broader public and minted a new generation of crypto-millionaires. This “New Money”, however, could not afford the “Old Money” cryptopunks. So the time was right for a new status symbol aimed at the new kids on the block.
Enter Yuga Labs, a group of four friends in Florida.
Yuga’s key NFT insight was both brilliant and simple. The Cryptopunk was valuable as an ostentatious display of status. It signaled that its owner was a member of the crypto elite.
But its value was only in this display. Members were not, in fact, part of any elite club. It was like they were wearing club jackets, but had no clubhouse. So Yuga asked themselves this question: what if Yuga could create such a club? What if the NFT they created was not just a profile picture, but a membership card to an elite, crypto SoHo House? Wouldn’t that be cooler?
They set to work crafting a narrative that would lure in their desired club members.
“Aping in” is a term-of-art in crypto circles. It means an investor has gone all-in on a particular investment. The Bored Ape founders imagined a future where these crypto Apes had grown wealthy and bored from their hyper profitable aping. Retired and complacent, these Apes now spent their days drinking at their Bored Ape Yacht Club.
Each NFT buyer would own one of the Apes in this participatory Yacht Club. A computer generated the Ape characters from a preset list of traits (sunglasses, hair, shirt style, etc.). The rarer the traits were in the set generated by the computer, the more valuable the specific Ape.
Influencers and Veblen Goods
It was a clever idea, but the project failed to pick up initial traction. On launch day, they sold only 600 of the 10,000 apes at a launch-price of $220 (.08Eth).
But then came the influencers. Intrigued by the art work and the potential to profit off of the next cryptopunk, Gary V, DJ 3Lau, NFT investor Pranksy and 888, an NFT Collective bought up a giant share of the supply of Apes. These whales owned up to 10% of the supply according to ChainDebrief.
Apes were now a scarce commodity. With supply firmly in hand, the influencer community just needed to drum up some demand.
You learn in Econ 101 that people buy less of a good when its price goes up. But there is an exception. A Veblen Good becomes more desirable as the prices rises. So once the initial influencers started the process of increasing prices, the BAYC caught fire.
Over the summer, a set of 101 Apes sold at Sotheby’s for $24.4M (average price: 240,000).
Then Christy’s sold four for $12M (average price $3M).
The high pricepoint attracted the rich and famous as owners.
Snoop Dogg, Steph Curry, Jimmy Fallon, Justin Bieber, Post Malone, Serena Williams and Shaq have all bought and promoted the Apes to their followers.
Today, the cheapest Apes sell for upwards of $220,000.
Now Apes are allying with brands like Adidas, Rolling Stone, CAA and Universal Music Group. Each company has a licensing deal with a specific Bored Ape owner. In a brilliant move, Yuga Labs vested the IP rights to each Ape to the holder of the NFT.
And so the hype-feedback loop keeps turning: the more famous the Apes become, the more valuable they seem to be, and the more famous they seem to be, the more valuable they become….
Yes, this is how bubbles work. But it's also how you create billions of dollars of value through the introduction of a new luxury good. We honestly don't know which the Bored Apes NFTs will be yet. The difference between a bubble and a boom is how well-supported the initial speculative frenzy is by the actual value of the product.
People are fond of saying that NFTs have no “inherent value”, but that’s not entirely true. Their value comes from the status they convey. As long as that status remains high, they will retain their value. But keeping status high is easier said than done.
The Status Monkey Cartel
There are certain “sacred texts” among people who build social media products. A recent addition to that canon is “Status as a Service.”
The basic argument of that piece is:
Humans seek out the most efficient way to increase their status (social capital).
Social media is an efficient tool to earn social capital by creating content.
The more mature a social media platform, the harder it is to gain status.
So it is efficient to build an audience on new social media platforms and help them grow.
These same insights apply to NFT projects like Bored Apes. Early adopters are investing in a potential high status item before it pops.
But Bored Apes also gained in notoriety far faster than the typical status platform. This is where the incentive alignment allowed by crypto is game-changing for social/status signaling.
Each of the ~6,000 Ape owners stand to gain in both money and status if the BAYC grows in popularity. If they can keep supply low, they can keep the perceived value high. The strategy is in the interest of each of the largest holders. It keeps the financial and social value of their Ape high. The Bored Apes have every incentive to operate like a cartel.
In a cartel, a group controls the supply of a resource. They coordinate to ensure maximum profits by keeping the supply in the market low. A Veblen Good cartel is extra powerful. The lower the supply, the higher the price. The higher the price, the higher the demand. Early in its life, a small group of influencers controlled a giant portion of the Ape supply so cartel coordination was easy. Today, there are roughly 6,000 Ape owners.
So the question facing the BAYC is how long this cartel behavior can last in the face of a larger number of actors. Bored Ape members will face the temptation to sell and cheat the cartel. Already, a group that owned 81 Bored Apes has voted to sell off its assets. If another group followed, the price could collapse. It would be like DeBeers flooding the market with very, very expensive diamonds.
To make it more rigorous, consider this toy model that describes a players’ incentives. Assume that the Bored Ape is currently priced at $100. Each turn of the game, its price can go up $10 or down $10 depending on the behavior of the other players. If you sell it now, you get $100. If you choose to wait you may have $110 or $90.
The expected value of holding or selling is equivalent in this case. So my decision must depend on whether I can trust that other Apes will also choose to hold. If they do, we all profit. So building trust among fellow Apes is crucial to maintaining the value of my investments. To do so we need to signal our commitment and hope that others reciprocate. This demonstrates why the “community” value prop is more than just a hook for the BAYC. It’s a critical component of cartel strategy.
One way to solidify group commitment is through direct coordination over the Discord. If a mass-sell starts triggering, someone is going to start sending “hodl” memes to the Discord. Other members may rush in coordinating in-group sales to pump up prices. Creating solidarity among members in the face of sell-offs is critical. So it’s in the interest of all Apes to continue to pull their members closer and keep them engaged in the community.
Yuga helps stimulate this engagement and commitment by promising that ownership will pay future dividends. They do this through their public roadmap that promises lavish events and future benefits, like a real-world clubhouse.
They also provide interim economic benefits. They are fleshing out brand-partnerships with Adidas and Rolling Stone that should increase the value of the project.
And just yesterday, they announced a way for members to “stake” their NFTs. This mechanism allows individuals to commit to not sell their NFT in exchange for rewards in the form of the newly issued Ape Token. It’s basically interest that accrues by promising not to sell your membership card.
The Apes also take advantage of the desire of other NFT projects to bask in their reflected glow. New projects often “whitelist” Bored Apes members to allow them early access. It's a mutually beneficial exchange. Apes get insider deals. NFT Founders get influential early adopters.
If the community can continue leveraging its status to increase profits, their members will continue to cooperate as a cartel. After all, Apes really are Together Strong.
Addendum: When the Apes met the Punks
While I was editing this piece, news broke that Yuga Labs had purchased the rights to the Cryptopunks collection. Cryptopunks are considered the other Blue Chip NFT collection. With an average sale price of $215,000, the collection’s implied valuation is also ~$2B.
The two NFT collections are rough substitutes for each other. If prices collapsed for either one, it would destabilize the other's value by undermining market confidence. Ensuring a tight grip on the two products bolsters the market power of Yuga and its community.
Yuga has not disclosed much about their plans for Cryptopunks, but they did make two announcements.
They would update the privileges of Punk ownership to match BAYC by granting owners of Cryptopunks full IP rights to their Punk.
They would not move to quickly establish a "Club" like BAYC that would encourage owners to interact and plan events together;
The first announcement makes perfect sense through the lens of extending cartel behavior to the Punks. By focusing on aligning the incentives and rights of owners with the project, existing owners stand to gain from the work that influencers and brands do to extend the Punks’ footprint. This should accelerate value accretion to Punk holders.
But their decision to delay creating a “club” among owners is confusing. Without a clear communication channel, cryptopunk owners will have to rely on implicit price signaling (or public Twitter posts) to prevent owners from panicking and flooding the market with supply when a bear market arrives. This is a more tenuous bet. Thus far, the Cryptopunks have held their value without needing explicit signaling. But the potential benefits of “cheating” and selling continue to rise with their prices.
Yuga will need to bet that it can provide enough new utility to keep Punks engaged without relying on direct community coordination. If they succeed, they will set another template for the NFT market, demonstrating that utility and perks can keep prices rising without relying on cartel cooperation. That would imply a far more scalable model for NFTs. But if they fail, the whole asset bubble could collapse with it.