Note: When I say "Skull villains" I'm not including Skull Spiders, by the way.
So, we know that Skull Slicer was previously an arena champion, but what if all the other Skull villains were also arena competitors, just not champions?
Perhaps in the time of the Mask Makers, Makuta would encourage new challengers to the Arena to go to him to receive a Mask of Power that mutated them, boosting their physical strength and proportions. Makuta felt this made the matches more entertaining, and allowed him to gain some admiration from villagers who would otherwise prefer Ekimu's work.
The Skull Mask design for new challengers was chosen because Makuta felt it reflected the brutality of the Arena, and it was fitting when the many deceased challengers were buried in them. This practise and the danger of the Arena led to the majority of graves in the City being filled by "Skull Warriors", buried with their weapons as a sign of respect.
Successful Arena combatants were sometimes granted new weapons or experimental mask designs. Slicer was granted a mask, designed to resemble a Skull Spider, that caused him to grow extra arms so that he could fend off multiple challengers at once. His reign as champion eventually ended with his death and burial in the City.
To further increase the entertainment factor of Arena contests, Makuta produced "Bull Skull Masks", designed to give a similar physical boost to captured wild animals. After experimenting with many creatures, "Skull Scorpios" were found to be a perfect subject to add to matches because of their aggression and the added danger from their stinger tails.
A relatively successful Arena combatant, Kulta defeated opponents by removing their masks so that they were too weakened to fight. This cunning strategy impressed Makuta, earned him the "Mask Stealer Staff" that allowed him to drain the energy from opponents' stolen masks to boost his own strength and size.
Becoming sadistic in his success, in one match Kulta decided to see what would happen if he placed a stolen Bull Skull Mask on the face of a de-masked opponent. Although the mask was intended to mutate animals, surprisingly it was still able to mutate the victim into a minotaur-like hybrid. Caught off-guard, Kulta was charged by the creature and both fell through a pit in the Arena to their deaths.
After the City was abandoned, Arena matches stopped and Skull Mask use (and users) died out. When Makuta later returned, his mental link to the masks that he had created (same as how Ekimu has a link to his masks) allowed him to resurrect and communicate with Kulta, as well as grant the Skull Army the mask draining power of Kulta's staff.
Why this works:
1. It gives identities to the Skull villains without requiring a new race that is now gone, or some sort of weird process where Skull villains are built out of more than one skeleton.
2. It sets up Makuta as being slightly sadistic, even before his downfall.
3. It fits with the description of Skull Basher being created by Kulta.
4. It explains how Makuta knew of Kulta.
5. Makuta's experimenting with size-boosting masks foreshadows the creation of the MoUP.
tl;dr The Skull Masks were made by Makuta to mutate villagers and creatures into forms better suited to fighting in the Arena. They later formed the link to Makuta needed for Makuta to resurrect them.
So, what do you think? (Apart from that my posts are too long. )