Why is ENS so popular? The difficulties it faces during its rapid development cannot be ignored.

Vitalik said in an interview earlier: "The Ethereum Domain Name Service ENS is the most successful non-financial Ethereum application to date." Recently, the price of ENS domain names has continued to hit new highs. In the bear market environment, the number of newly registered ENS domain names has also increased. So, why are ENS domain names so popular? What are the characteristics compared with traditional Web domain names? Among ENS domain names, what kind of ENS domain names are the most popular and have value potential? What problems are there behind the booming ENS? How will ENS solve these problems in the future? This article will briefly discuss these issues.

Why ENS is so popular

In the crypto industry, apart from the DeFi field, many applications are not successful, and the hype of these projects is often greater than the actual demand. After experiencing explosive growth, many popular applications often encounter bottlenecks in development, with the tokens losing their appeal and even going into a death spiral, such as the previously popular AXIE and the running shoe project STEPN. On the other hand, ENS can easily be seen from the data how it is successful, and behind these data is the huge real demand of users.

According to Messari data, despite the weak market, ENS monthly active addresses remain strong, with monthly active addresses still increasing 2.5 times year-on-year; ENS domain name registrations reached a record high of 1.12 million in the third quarter of 2022, a month-on-month increase of 71%. At the same time, in the third quarter of 2022, renewals increased by 3 times month-on-month to more than 100,000 times; ENS domain name registration and renewal revenue decreased by 17% month-on-month in US dollars (an increase of 30% in ETH).

Which ENS domains are the most valuable?

The prices of ENS domain names have frequently hit new highs recently. So which domain names are more valuable? Which domain names have greater potential for appreciation in the future?

According to Messari data, in terms of ENS name length, names longer than 5 characters accounted for 1.06 million (96%) of all 1.12 million registrations in the third quarter of 2022. It is worth noting that the absolute value increased by 79% month-on-month, from 600,000 in the second quarter of 2022 to 1.1 million in the third quarter of 2022. Registrations for names longer than 5 characters grew faster than overall ENS registrations (71% month-on-month). Renewals for 3- and 4-character names have increased over the past six quarters, accounting for 27% of all renewals in the third quarter of 2022. In contrast, renewals for domain names longer than 5 characters have been declining over the past six quarters. In addition, by default, it costs more to register and renew a 3 or 4-character name: $640 and $160 per year to register, respectively, while names with more than 5 characters cost only $5 per year.

In general, from the perspective of registration growth, longer domain names are cheaper and have lower registration costs, and they grow faster than short-character domain names. In addition, 3- and 4-character names have been registered in large numbers, which is also a reason why more names with more than 5 characters are registered. From the perspective of renewal volume, although popular 3- and 4-character domain names have high registration costs due to their relatively small number, they have shown explosive growth in renewal volume, which means that the market is optimistic about their long-term value storage due to their scarcity.

Dilemma and solution of ENS

From the above data and analysis, we can see that the number of ENS domain name registrations is increasing rapidly, and some domain names have been hyped. Some problems have arisen in this development process. For example, ENS domain names are very cheap now. It only costs $5 per year to register and maintain a five-letter domain name. In the early stages of development, some speculators can use a small amount of money to register a large number of domain names, thereby hoarding them. With the development of blockchain, this is obviously very disadvantageous for some people or institutions with real needs. In addition, now in the ENS trading market, many domain names are hyped very high, but ENS DAO gets very little income, which may limit its ability to improve the ecosystem. So, how to solve these problems? What interesting suggestions does the community have?

Vitalik Buterin has previously published a special article to explore the above issues. The core is to propose two models: demand-based recurring pricing and demand-based capped recurring pricing. The core point of the first model is that anyone can bid on a specific domain name. If they keep the bids open long enough, the valuation of the domain name will rise to this level, and the annual fee of the domain name will be proportional to the valuation; if no one bids, the fee may decrease at a constant rate. The second model is to establish a function and then use this function to calculate a domain name holding fee to be paid for any fixed number of years. The holder can pay the amount in advance to guarantee the ownership of the domain name within that period. The second model is more recognized by Vitalik Buterin because he believes that paying more for long-term security is a common feature of all economies.

In response to Vitalik's point of view, ENS core developer Jeff Lau refuted his point of view in a post on social media: Regarding Vitalik's suggestion, the ENS team actually considered it a long time ago, but without intervention, ENS developers have not been able to build a way to have a self-perpetuating pricing system and create an ungameable pricing system; so they finally decided to maintain a more reasonable low price and only charge higher fees for shorter domain names.

Jeff Lau believes that subdomains may be a solution to the above problems. She believes that subdomains can solve at least the following two problems: 1. The "congestion problem" of some high-value domain names in the domain name space (such as some domain names based on 5 letters); 2. The rapid price surge of .eth domain names in the secondary market.

At present, ENS is still in its early stages of development and is expected to usher in huge growth in the future; however, with the development of the blockchain industry, speculation is also on the rise, and there is no definite answer on how to solve this problem in the future. From an investment perspective, short domain names with less than 5 characters have relatively strong value preservation, and long domain names are recommended based on actual needs.