Ever try to create your own website and decide to personalize your domain name only to find someone else has bought it? (Damn you, the “other” Todd Mei!).
Of course, you can buy the name from the owner — but usually for an unreasonable, if not exorbitant, amount.
Domain name squatting is nothing new, and its affected Web3 names in much the same way — though there are some important differences. The most important of these is ideological and practical:
Since Web3 is supposed to be about decentralization. And decentralization is supposed to be about a lack of exclusive ownership, squatting is making a mockery of it all because its disrupting Web3 via buying up names in expecation of being able to sell them at profit.
This sounds extortionist — and it can be if someone can get a hold of a proprietary name and do things to hurt the reputation of the original person or institution. Will the real Elon Musk please stand up?
So let’s dig a little deeper into the phenomenon of Web3 squatting, why its problematic, and how it might be remedied.
Web3: What Is ENS?
ENS stands for “Ethereum Name Service”. The easiest way to think of what ENS does is by way of the internet domain names (or DNS) with which we are all familiar. DNS addresses originally were long number-based names which made things difficult for users if they wanted to recall an address. Eventually, numbered addresses became “human-readable” names. When online, we can simply type in a domain name, such as “theartofthebubble.com” (or click on its hyperlink) and be taken to the respective website.
The same is true of ENS sites, except that instead of running on Web2 protocols, the navigator is taken to a site built on Ethereum as a distributed network. Before getting into more specific differences between Web2 and Web3 site names, let’s just summarize what ENS squatting is all about.
What Is ENS Squatting?
The term squatting comes from the “practice” of occupying and using land that is vacant but owned. As we will see at the end, this term does not really accurately describe the practice.
The main squatter tactic is to discreetly occupy a vacant building where the landlord is absent. In some countries there are squatting rights which enable squatters to take ownership of the vacant (yet owned) land if they squat continuously on the land. In Britain, for example, squatters can take ownership after 10 consecutive years of occupation.
Essentially (as mentioned above), ENS squatting is equivalent to buying domain names in order to sell or rent them. So it’s a speculative exercise in anticipating which names might be sought due to popularity or proprietary connections (i.e. big businesses or important persons who might want a site name related to their business or name). This can include popular phrases or words (e.g. freedom.io) or trademarks (thecoop.io).
For example, here’s what happens when I typed in an ENS “coop.io”:
Screenshot of the Website of an ENS Squatter after typing “coop.io”
It all looks friendly, but fleecing someone for as much as you can get doesn’t always have to be so confrontational! 🙃
How Does ENS Work (Distinct to DNS)?
The main goal of ENS is to provide efficiency through distribution. The ideal of distribution is mainly in view of wider access — anyone can register a name on Ethereum and anyone can connect their wallet address to their registered name.
But that is where the efficiencies of distribution end.
The design of ENS appears to be ambivalent about what distribution and decentralization actually mean. One commentator is adamant that ENS names cannot be owned because:
- the naming process in ENS does not grant ownership or trademark as it does in the DNS world; and
- the process of registering a name is one of locking or burning funds (ETH) as opposed to sending funds to another person or organization in order to buy or lease the name.
But one wonders if this was the original intention of the ENS creators (i.e. Nick Johnson and Alex Van de Sande of the Ethereum Foundation) since according to ENS’s own information site, the person who has oversight of the name (the registrant) is described as the owner:
“Registrant: The owner of a registration. The registrant may transfer the registration, set the Controller, and reclaim ownership of the name in the registry if required.”
In short, it would appear that individuals can squat ENS names by engaging in the process of locking funds to register names they think others will want to buy. Once someone expresses interest and pays the “selling” price (perhaps “transfer price” is a better term), then the registrant can move things over.
To be sure, there is an auction process which is supposed to help make things fairer. ENS names are actually NFTs whose proof of registration can be transferred just like any NFT. Vickrey Auction runs the ENS process based on a sealed-bid second-price auction:
“Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid.’
As you might expect, there are ways bidders can game the auction. Here’s a summary of one tactic by Billy Rennekamp:
“While Ethereum transactions and events are always visible on block explorers, ENS names are hashed with a technique called Namehash (EIP 137). This keeps names cheap to store on chain and adds a layer of privacy to the auction process. However, thanks to Rainbow Tables utilized by Etherscan and other services, many common words are pre-hashed and compared against the incoming auctions.”
In sum, this means Rainbow Tables can act as an early warning system.
What’s more, because ENS is based on a decentralized network and hence a decentralized naming system, it falls outside the jurisdiction of The Internet Corporation for Assigned Names and Numbers (ICANN), which is a non-profit organization responsible for the safety and security of internet (i.e. Web2) operations.
It sounds very much like the Wild West of ENS grabbing.
A Modest Proposal: Feel the Fee
Parallels to how the land and housing market work are too tempting to pass up. Squatting a ENS name is more accurately like land speculation — where someone buys unused land in anticipation that it will be needed.
This comparison is no trivial point. It’s not “ENS squatting” but “ENS name speculation”.
While there is much to say about land speculation, staying with this comparison brings to mind a measure that helps to curb it. I say more about the land-specific measure in an academic monpgraph; but for our purposes let’s just note that the main incentive of land speculation is to hold the vacant land for as long as possible until someone is willing to pay a very high price.
The speculator only loses if s/he has borrowed money to purchase the land and is losing on the interest payment or, worse yet, cannot make the payments. Most speculators will build in interest costs over the years of holding land vacant (yes, years and some even decades!).
The other way speculators lose is if they are charged a land value tax (not a property tax, which falls on capital improvements). A land value tax (LVT) is a majority (if not 100%) tax on the land value. What this comes down to is that the land is only worth holding if the owner is using it for production (since producing on the land pays for the tax while holding it vacant does not). Thus with a land value tax, there is no incentive to hold the land vacant or unproductive. It turns the practice of owning land from one of “in perpetuity” to “in perpetuity so long as one is using it”.
Is such a measure needed with respect to ENS?
Imagine paying 10ETH ($12,756 at the time of writing) for a name if you are a person of notoriety who wants their own site and to prevent others from using the name to harm their reputation?
The speculators may be enterprising in determining which names to buy up, but they are essentially being parasitic on existing value. Think of it this way — What are such speculators adding to the socio-economic landscape?
Now think of this in the context of the ideals of Web3’s distributed network? No one should have ownership of network resources that comes at a cost to those who have real utility for said resources.
The remedy, then, might be something like an ENS version of the LVT.
Kirk Hutchinson pretty much proposes the ENS equivalent of a LVT:
“[T]he fee to register ENS names for a certain time [is] based on length with a “carry fee” based on highest current bid (to incentivize squatters to sell) and how long a holder has had their name (to prevent opportunists from pressuring long term holders to sell their names). Add a “bid” function to the ENS contract, allowing anyone to commit to a bid. The highest “active bid” (bidding account has sufficient funds for the sale to proceed when seller calls “accept”) determines the “carry fee”, which will be a certain percent of the highest active bid as determined by governance, less a “long term discount” to make sure those who have good cause to hold their name for the long haul don’t get pressured to sell by opportunists with deep pockets.
The result is that the cost to hold a given name becomes proportional to the demand for that name, with a discount for the holder’s conviction in the name.”
And unlike the land and housing market, where the process of overseeing values is governed by real estate agents, the carry fee process could be automated by smart contracts.
This article originally appeared on Medium and is a part of the Crypto Industry Essentials educational program presented by The Art of the Bubble.
Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his The Art of the Bubble education series on cryptocurrencies.
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