Web3 Domain Ruler: A comprehensive overview of ENS status and prospects

If cryptocurrency really goes mainstream, Web3 domain names will have a broad market. Because "everyone" will eventually have a Web3 wallet, and human-readable digital wallet addresses are as common as email addresses. In this report, we will introduce ENS, the largest Web3 domain name provider on the market, from 9 parts: business model, network effect and financial status, token economics, valuation/target (addressable) market, technology and roadmap, core team/supporters, DAO governance/community/social, competition and risks.

1. Business Model

There are many fascinating parallels between the early internet and the early crypto industry. ENS is a great example of this. Before web domains appeared in 1986, Internet users would identify websites with IP addresses (a string of random numbers). Every computer on the network would identify each other in this way, allowing data to be shared between computers.

Of course, this was not conducive to the popularity of the Internet. The Internet could not become mainstream until IP addresses were mapped to human-readable domain names, or URLs.

Today, the Internet Corporation for Assigned Names and Numbers (ICANN — a non-profit corporation) is responsible for managing the top-level development and architecture of the Internet domain name space. ICANN accredits domain name registrars, through whom domain names can be registered or reallocated to end users/registrants. The process is as follows:

If we map this process onto Web3 protocols like ENS, we see that in some cases ENS plays multiple roles: infrastructure (ICANN), registry operator, and registrar (GoDaddy, domains.com, etc.) .

icann.og

Crypto wallet addresses today are similar to website IP addresses in 1986. On the Ethereum network, the address looks like this: 0xd85f8858478a054d3ea67e8fb3d088b2ec86edce .

Services like ENS make wallet addresses human-readable, like " michael.eth ".

Crypto addresses are more than just digital wallets. They can represent websites, identities, information services, and more. As far as websites are concerned, ENS currently supports ".com", ".org", ".io", ".app", etc., and browsers that support ENS include Brave, Opera, Status (mobile) and MetaMask (mobile).

Today, human-readable website addresses are represented by extensions such as ".com", ".org", ".net", ".edu", ".gov", etc. ENS introduced ".eth" to the world and seeks to become the number one domain name/address registry on the Ethereum network, aiming to enable crypto users to easily identify each other by human-readable blockchain addresses or wallets. ENS will not disrupt traditional domain names for websites. Instead, the protocol is built to integrate directly with traditional ".com", ".org", ".edu" domains - integrating content, blockchain-native payments, and custody of digital goods (NFTs) on the same user interface .

The ENS protocol makes money by selling new address registrations and renewals. Users prepay for their crypto domains/addresses for a certain number of years, and renewals drive further revenue.

The agreement generates $55 million in revenue in 2022 and $4.8 million in revenue so far in 2023.

2. Network Effect

The network effect of ENS comes directly from Ethereum, the largest smart contract platform on the market. As a Layer 1 blockchain, Ethereum dominates nearly 80% of the market in terms of developer talent, applications, locked value, revenue, developer tools and standardization (token standards, programming languages, EVM, etc.).

If you believe that Web3 will become mainstream and Ethereum will become one of the main public chains, then betting on ENS is essentially betting on Ethereum (without leverage).

Here’s a quick graph of ENS adoption rates so far in relation to the number of Ethereum wallets:

Data: Etherscan, Dune @makoto, Glassnode

There are currently over 95 million non-zero Ethereum wallet addresses in the world. At the same time, only 2.8 million of these addresses use the ".eth" domain name, which is about 3% , a very large gap. We believe that the vast majority of wallet addresses will hopefully become human-readable at some point in the future. Of course, our assumption depends on mainstream adoption and usage, that is, human-readable wallets become a necessity. Given the growth rate that has already been shown, we think there is an opportunity.

In terms of renewal, on-chain data shows that the average churn rate is about 50% - user stickiness is quite good. In terms of overall registration growth, ".eth" has grown by 228% annually over the past three years.

Data: Dune @makoto

On-chain financial situation

Data: Arcana, Token Terminal

We can see that the protocol is continuing to grow in new registered users and revenue. Meanwhile, ENS token incentives are 0 to date - a positive sign for product/market fit. In terms of spending, the DAO consumed $1.27 million on its core work in the second half of 2022.

Additionally, ENS has one of the largest balance sheets in crypto — with over $900 million currently locked in the DAO Treasury. We note that the treasury holds mostly ENS tokens, so there is definitely some downside risk. That being said, the project is primarily funded by revenue and has a healthy balance sheet that can withstand a market downturn. According to the DAO wallet address on Etherscan , the treasury currently holds approximately $17 million USDC, $24 million ETH, and $132 million ENS. The remaining value comes from unreleased ENS tokens.

Token Economics

The maximum supply of ENS is 100 million. The current circulating supply accounts for about 25.7%. Its distribution is as follows:

• 25% goes to early .eth name holders — based on how long an address holds the name. These tokens are unlocked and distributed all at once.

• 25% is allocated to early contributors of ENS (more than 100 individuals, groups and more than 450 active Discord users). Currently, 24% has been unlocked, and the remaining tokens will be unlocked linearly over 4 years, unlocking 13,369 ENS per day. The core contributors' tokens will be unlocked by the end of 2025.

• 50% is allocated to the DAO community treasury. 10% (5 million tokens) was allocated to the DAO at the start of the project, and the rest was unlocked over 4 years. 24% has been unlocked, and the remaining tokens are unlocked at a rate of 30,801 per day. The community portion will be unlocked by the end of 2025.

There are currently at least 64,000 token holders. The largest wallet addresses outside of the DAO appear to be two Binance exchange accounts, which together hold 5.2% of the supply.

Since ENS was spun off from the Ethereum Foundation and operates as a non-profit, there are no outside investors or VCs involved . This helps reduce the risks associated with large insider selling, but we should be aware that early contributors hold a large number of tokens that are unlocking linearly. And, while a large number of tokens are unlocked every day, the DAO cannot spend these tokens without community approval. In fact, the community recently voted to sell some ETH to cover operating costs over the next few years.

4. Valuation and Target Market

• Current Token Price: $12.63

• Current market value: $256 million

• Fully diluted valuation: $1.26 billion

• Revenue in the past year: $50.98 million

• One-year P/E ratio: 24.71 (fully diluted)

There are currently 95 million Ethereum non-zero addresses - a number that has grown at an average annual rate of 39% over the past three years, of which about 3% (2.79 million, with an average growth rate of 228% over three years) own ".eth" domain names.

1. Basics

The base case assumes a 30% growth rate for Ethereum non-zero addresses over the next 3 years, with more than 200 million non-zero addresses worldwide in 2025. If we assume a 30% growth rate for ENS domains over the same period (a 3-year average of 228%), there will be at least 13.5 million ENS domains, or 6.6% of all Ethereum non-zero addresses. At $15 per address per year (last year’s average was $19.71), the protocol will also generate $200 million in annual recurring revenue (ARR) .

2. Bear Market

Bears can assume a 15% growth rate for Ethereum non-zero wallets, a 15% growth rate for ENS addresses, and a $10 annual registration fee, generating approximately $64 million in annual recurring revenue .

(III) Bull Market

If the growth of Ethereum non-zero addresses and ENS addresses grow at a rate of 45% per year over the next 3 years, at $15 per ENS address, the network's annual recurring revenue can reach nearly $400 million . In this case, by 2025, we will have more than 280 million non-zero addresses, of which more than 9% will have a ".eth" extension. 280 million Ethereum addresses only account for 5% of global Internet users .

If Ethereum non-zero addresses reach 500 million (8.9% of current Internet users), and 15% of them adopt ".eth" domain name addresses with an average registration cost of $10, this will be equivalent to $750 million in revenue.

Relative valuation . ENS’s Web2 counterpart is Verisign, which now has a P/E ratio of 31.7 and a market cap of $20 billion. We believe ENS has the potential to be larger than Verisign in terms of commercial scale because if Ethereum becomes mainstream, the vast majority of Web3 users will own Web3 domains — rather than the relatively small percentage of Internet users who own Web domains today.

5. Technology and Roadmap

The technology behind ENS is fairly straightforward to understand. The domain registry consists of a single smart contract that maintains all domains and subdomains, while storing three key pieces of information about each domain:

• Owner of the domain name (blockchain native address)

• Domain name resolver (converts domain names into addresses)

• The cache lifetime value (TTL) of all records under this domain name

The owner of a domain name can be an external account (user) or a smart contract. A registrar is just a smart contract that owns a domain name and issues subdomains that follow the rules defined by the contract. A subdomain of "thedefireport.eth" might look like this: "pay.thedefireport.eth".

The team is currently focusing on business integration, PR and marketing. Coinbase is working with ENS to provide Coinbase-managed Web3 usernames for its 110 million verified accounts. In this case, "cb.id" is the registrar on ENS, and the subdomain is the user address - for example, "mike.cb.id". This allows Coinbase users to transfer money between human-readable accounts instead of using random strings of numbers and letters tied to Coinbase accounts.

Audits. We can’t forget about audits. ENS smart contracts have been audited by Consensys and ChainSecurity.

6. Core Team/Supporters

ENS was initially funded by the Ethereum Foundation and officially operated by a non-profit organization registered in Singapore. The ENS Foundation has three directors: Nick Johnson, Brantly Millegan and Kevin Gaspar. Ethereum founder Vitalik Buterin is a supporter of the ENS team and highlighted the project in a recent article titled "Exciting Directions in the Ethereum Ecosystem."

To facilitate upgrades and maintenance, the ENS root domain contract Root is controlled by 4/7 multi-signatures, and the private key holders are members of the core team and related projects. In the long run, the protocol plans to replace the root domain multi-signature (root multisig) with decentralized decision-making as the system emerges. Multi-signature members include:

• Nick Johnson - ENS

• Dan Finlay - MetaMask

• Aron Fischer - Colony

• Martin Swende - Ethereum Foundation

• Sergey Nazarov - Chainlink

• Taylor Monahan - MyCrypto

• Jason Carver - Ethereum Foundation

7. DAO Governance/Community/Social

ENS is a non-profit organization that runs the infrastructure for Web3 domain names through ENS Labs. We believe that Internet domain names are fundamental Internet infrastructure and should not be owned by a single centralized entity - just like base layer Internet protocols such as SMTP (email) are not owned by anyone. The ENS Charter provides a set of binding rules for the DAO to take legitimate governance actions.

In terms of "crypto presence", ENS is quite strong. ENS's Twitter account has more than 240,000 followers. The Discord channel has more than 43,000 members, and the LinkedIn account has more than 17,000 followers.

We’ve noticed that many Twitter users display their “.eth” addresses in their public-facing profiles — this is a form of “social proof” that the user is “crypto native” and can serve as a strong form of organic marketing for the protocol.

8. Competition

Currently, Unstoppable Domains is the biggest competitor to ENS. Unfortunately, they use a Web2 business model. Therefore, there is no transparency into their finances or growth, except for their internal reporting.

Unstoppable Domain registrations are lifelong, so there is no recurring revenue. Users never have to think about renewals or domains being snatched away after they expire. In contrast, ENS domains are registered annually or for several years at a time. Both solutions are ERC-721 tokens (NFTs). Unstoppable domains offer extensions for a variety of different chains: ".zil", ".888", ".dao", ".blockchain", ".x", ".nft", ".wallet", ".crypto", ".bitcoin". At the same time, ENS only offers one extension on the Ethereum network: ".eth".

Both products can be integrated with other networks/wallets , and both offer subdomains. For example, a user can register "thedefireport.eth" and the subdomain can be "pay.thedefireport.eth".

Currently, ENS is the more popular domain name provider on the Ethereum network. As mentioned earlier, the ".eth" domain is used as a social signal on Twitter that you are a "crypto veteran". We think this is quite powerful and may enable ENS to dominate the Ethereum network to capture most of the crypto domain name market (80% market share). We expect Unstoppable Domains to compete in more horizontal markets in the Layer1 ecosystem.

Finally, we think ENS's stance that "Web3 domains are public infrastructure" is a strong business strategy for crypto natives. We've seen the power of open source projects versus closed source projects. The competition between ENS and Unstoppable Domains is a bit like the competition between (monetized) Wikipedia and Encarta. As Joy's law states: "For whatever number of smart people work for you, there are more smart people working for someone else." Open source tends to win in the long run. It will be difficult for competing centralized solutions backed by VCs to surpass the narrative and power of open source without a clear differentiation.

IX. Risks

ENS is built on the Ethereum blockchain and is therefore closely tied to Ethereum's adoption and growth. Ethereum's 80% dominance in smart contracts is difficult to shake in the short to medium term. However, competitors may cut into its market share over time. Each blockchain network may have its own domain extension. For example, ENS's counterpart in the Solana ecosystem is Bonfida, which introduced the ".sol" extension for Web3 domain names.

There are also smart contract risks and financial risks - because the assets in the DAO treasury are mainly the native token ENS.

Verticals such as DNS domain name services tend to allow winners to dominate the majority of the market. The ".com" extension is very inspiring, with at least half of the Internet domain names using it as an extension. Today, there are two domain name giants in Web3: ENS and Unstoppable Domains. The business models of the two are completely different, so it remains to be seen whether users prefer the "lifetime domain name" model of Unstoppable Domains or the recurring revenue model of ".eth".

ENS is still a very young project. Many decisions today are made by the 7 “ENS Board” members who control the multi-signature wallet. For the long-term success of the project, we need the following 5 things: a growing developer base, integration with ecosystem infrastructure, ongoing maintenance of smart contracts, effective marketing, and responsible management of the DAO treasury. We have seen execution on these aspects and will continue to monitor the project.