Ballerina theory
After the last episode showing that dreams come true in some form in the original settlement, I now tend to believe that the ballerina entity and the MiY are entirely different entities and I think there’s a reason why the MiY/Sophia looked almost afraid after recognizing the ballerina in the storage room.
I think there are two entities that control the town:
The Man in Yellow
Ballerina
The ballerina is what makes people’s dreams come alive
The man in yellow is a separate entity that feeds off fears but can manipulate technology etc
The ballerina was likely the original entity in the town before the MiY came along that made dreams come alive. I think the MiY knows the ballerina is more powerful than him in most cases but nobody has figured that out yet because he holds too much control over the souls who are trapped there.
Sidebar theory and something I noticed is that I think Marielle confirmed that the lake of tears is the place where are the souls are trapped. It’s likely where she hears the screams from the people who are trapped there..
Mostly just spitballing here but an excited to see how this all pans out eventually