Buterin : Breaking the ENS domain monopoly and setting demand-based normal fees

ENS domains are cheap these days. The cost of registering and maintaining a five-letter domain name is only $5 per year. This sounds reasonable from the perspective of someone trying to register a single domain name, but from a global perspective, things are very different: in the earlier days of ENS, someone could register a five-letter name at will. Word domain name and one hundred years of ownership upfront. Today, the domain names for almost all of these words are already taken, waiting for someone to buy the domain name from them at a higher price. OpenSea data shows that about 40% of domain names are for sale or only on the platform.

Is this really the best way to assign domain names? The ENS DAO earns far less revenue than it could otherwise, limiting its ability to improve the ecosystem. The status quo is also not conducive to the fairness of the ecosystem. Being able to buy a domain name cheaply was good for people in 2017 and feasible in 2022, but the consequence is that it could seriously hinder the ecology going forward in 2050. Considering that the actual cost of purchasing a domain name varies from 0.1 to 500 ETH, the nominally cheap registration price does not actually save the user any cost. In fact, relying on secondary markets makes domain names more expensive than good in-protocol mechanisms.

Can we assign ownership of domain names in a better way? Is there a way to add more revenue to the ENS DAO and better ensure that domains are owned by those who can take advantage of them, while maintaining trusted neutrality and accessibility, the long-term ownership that makes ENS valuable Strong guarantee?

Problem 1: There is a fundamental trade-off between the power of ownership and fairness

Suppose there are N “high-value domain names”, after P years, no one can acquire a high-value domain name again.

Unlimited time allocation of finite resources is incompatible with long-term equity, and neither is land. This is why there have been so many land reforms throughout history, and a big reason why many people today advocate a land tax. The same is true for domain names, although early .com domain name holders temporarily alleviated the problems in the traditional domain name space by “forced dilution” in the form of massive introductions of .io, .me, .network and many others. ENS has verbally committed not to add new top-level domains to avoid undermining its chances of eventual integration with mainstream DNS, so this dilution is not an option.

Fortunately, ENS charges not only a one-time fee to register a domain name, but also a recurring annual fee for maintaining the domain name. Not all decentralized domain name systems have the foresight to achieve this. Not so with Unstoppable Domains, which prefers short-term consumer appeal (never renews) over long-term sustainability. Normal fees for ENS and traditional DNS are a healthy way to mitigate the excesses of a truly unlimited “one-time-own” model. At the very least, the normal fees mean no one accidentally locks a domain name forever just because of forgetting or being careless. But that may not be enough. It’s still possible to spend $500 to lock an ENS domain name for a century, and there are definitely some types of domains that are in high enough demand that the price is vastly undervalued.

Problem 2: Speculators are not actually creating an efficient market

Because of the “first-come, first-served” model with lower fixed fees, many domain names are bought by speculators, but speculation is natural and a good thing. It’s a free market mechanism where speculators really want to maximize their profits and they are incentivized to resell the domain name in such a way that it will give anyone who can take full advantage of the domain name and their excess return is just for this compensation for such services.

But it turns out that profit-maximizing auctioneers don’t actually maximize social welfare. As shown below.

Buterin: Break the ENS domain monopoly and set a normal fee based on demand

Maximizing a seller’s revenue pretty much means accepting the possibility of not selling the domain name at all, leaving it completely idle. Auctions aimed at maximizing seller revenue are least efficient when there is one potential buyer (or at least one buyer with a valuation much higher than the others), and when there are many competing potential buyers home, this efficiency decreases rapidly. But for a large number of domain names, the first category is exactly where they are. For example, there are people, projects or companies that buy their domain names with the same name. So if a speculator buys such a domain name, they will of course set the price high, accepting the high odds that the deal may never happen, in order to maximize their income should a deal occur.

Therefore, we cannot say that speculators take most of the domain name distribution revenue only to compensate them for ensuring that the market is efficient. Conversely, speculators can easily make the market worse than the well-designed mechanism in the protocol (encouraging domain names to be sold directly at a fair price).

Set stricter standards for stability of domain name ownership

The monopoly problem of overly strict ownership of non-fungible assets has long been known. Addressing this problem in a market-based manner was the original goal of the Harberger tax: to require owners of each encumbered asset to set a price at which they would be willing to sell to others, and based on that price An annual fee is charged. For example, 0.5% of the sales price can be charged annually. Holders will be incentivized to leave assets available for purchase at reasonable prices, and “lazy” holders who refuse to sell will lose money every year.

But the risk of being forced to sell something at any point can have enormous economic and psychological costs, and because of this, advocates of the Harberger tax have generally focused on the application of ownership by mature market participants.

It turns out that domain names don’t get Hodl very well. Domain owners are often immature, the cost of changing a domain name is often high, and the negative externalities of a wrong domain name replacement can be large. The most valuable owner of coinbase.eth could not be Coinbase, or it could be that a scammer grabbed the domain name and immediately forged a charity or ICO claiming it was run by Coinbase to get people to send money to this address. For these reasons, Harberg’s taxation of domain names is not a good idea.

Alternative Solution 1: Demand-Based Normality Pricing

Today, there are normal fees for maintaining ownership of ENS domains. This is a simple and very low $5 per year fee for most domain names. But what if we charge based on the actual level of market demand for that domain name?

This does not require the domain name to be immediately available for sale at a specific price. Instead, the initiative in the pricing process will fall on the bidder. Anyone can bid on a particular domain name, and if they keep an open bid long enough (say, 4 weeks), the domain’s valuation will rise to that level. The annual fee for the domain name will be proportional to the valuation. It can be set to 0.5% of the valuation). If there is no bid, the fee may drop at a constant rate. 

Buterin: Break the ENS domain monopoly and set a normal fee based on demand

When bidders send their bid amount to a smart contract for bidding, the owner has two options: they can accept the bid, or they can reject it, although they may start paying higher prices. If a bidder bids more than the domain’s actual value, the domain owner can sell the domain to them, costing the bidder a fortune.

This property is important because it means that “breaking” the domain name holder is risky and expensive, and may even end up benefiting the victim. If you own a domain name and a powerful person wants to harass or censor you, they may try to bid high on the domain name to significantly increase your annual fee. But if they do, you can sell them directly and charge a hefty sum.

This already provides more stability to ENS domain prices and is more friendly to novice buyers than the aforementioned Harberger tax. Domain owners don’t need to always worry about whether they’re setting their prices too low. Instead, they can pay the annual fee outright, and if someone bids, they can take 4 weeks to make a decision to either sell the domain name or keep holding it and accept a higher fee. But even this may not provide enough stability. To go further, we need to make compromises within compromises.

Alternative Solution 2: Normal Demand-Based Pricing Caps

We can modify the above scheme to provide stronger protection for domain name holders. We can try to provide the following properties:

Strong time-limited title guarantee: For any fixed number of years, it is always possible to calculate a fixed amount that you can pay up front to unconditionally guarantee ownership for at least that number of years.

As shown in the figure:

Buterin: Break the ENS domain monopoly and set a normal fee based on demand

Note that the numbers in the table are only the theoretical maximum required to hold a domain name for a certain number of years. In fact, almost no domain name will have a high bid, so almost all domain name holders will end up paying much less than the maximum price.

Some versions of “annual fee caps” are strictly more beneficial to existing domain name holders than the status quo. We can imagine a system in which domains that do not receive bids do not pay any annual fee, and bids can increase the annual fee to a maximum of $5 per year.

The demand from outside bids clearly provides some signals about the value of the domain name (and thus to what extent the owner excludes other buyers by maintaining control of the domain name). So I think some attractive parameter options should be found for demand-based fees.

A superlinear f(N) value that increases the maximum annual fee over time is a good idea. First, paying more for long-term security is a common feature of the entire economy. Fixed-rate mortgages typically have higher interest rates than variable-rate mortgages. You can earn higher interest by making a long-term locked deposit. This is compensation that the bank pays you because you provide the bank with long-term security. Likewise, longer-dated government bonds typically yield higher yields. Second, the annual fee should be able to eventually adjust based on the market value of the domain name, we just don’t want it to happen too quickly.

Two possible scenarios for successful implementation

  1. Democratic Legitimacy: Come up with a compromise, a really adequate compromise that will satisfy more people, and maybe even make some existing domain name holders (not just potential domain name holders) better off.

    For example, we can charge an annual fee on demand, up to $640 per year for the longest 8-letter domain name, and $5 per year for the longest domain name, and the domain holder does not pay anything if no one bids. Many ordinary users can save money with such an offer.

  2. Market Legitimacy: Legitimacy is required by creating a new system (or subsystem) to avoid overthrowing expectations under an existing system.

    A possible compromise would be for the ENS DAO to hand over single-letter domain names individually to projects that run some other type of trusted neutral marketplace for their subdomains, as long as they hand over at least 50% of their revenue to the ENS DAO.

Summarize

If changing the ENS domain pricing issue is not possible, then a market-based, explicit incentive to have different rules for subdomains should be considered.

To me, the crypto space is not just about money. Instead, my interest in this area is more about trusted neutrality, and providing a high degree of ownership guarantees, but at the same time increasing the cost of cybersquatting, adding more revenue to the ENS DAO, and improving those who don’t get what they want The opportunity for people with domain names to get domain names. A high degree of assurance of ownership is very important for the proper functioning of the Domain Name System.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/buterin-breaking-the-ens-domain-monopoly-and-setting-demand-based-normal-fees/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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