ENS from multiple perspectives: the key to the Web3 era

ENS (Ethereum Domain Name Service) is mature in both technology and business, and operates its infrastructure in the form of a DAO. Judging from the data, the short-term hype bubble of ENS is gradually being digested, and there is great room for imagination in the long term.

summary

The traditional domain name market is saturated, and Web3 domain names meet new user needs. The domain name market has grown rapidly in the past 20 years, but it is now close to saturation. In 2020, the global domain name registration market size was 374 million, a year-on-year increase of 0.7%, and the domain name registration market size in China reached 43.008 million. In the Web3 field, another type of domain name is emerging. Web3 domain names are different from DNS domain names in terms of mapping objects, resolution methods, recording methods, and ecological development. Web3 domain names provide readable names for wallet addresses, which is a demand that traditional domain names cannot meet.

Readable identity identifiers, Web3 domain names are the cornerstone of DID development. Decentralized identifiers are the key to digital identity, but it is difficult to ensure readability while ensuring decentralization and security (Zooko triangle paradox). The readability of identifiers implemented by Web3 domain names has significant social significance. At the beginning of the current ecosystem, we can also see that when the Twitter name was changed to xx.eth, the identity barrier between Web2 and Web3 was broken, and all the data associated with the user in the ecosystem can be seen through one name.

ENS (Ethereum Domain Name Service) is mature in both technology and business, and operates infrastructure in the form of DAO. In terms of business revenue, ENS charges a fixed annual fee based on the length of the registered domain name. The fee is based on the number of characters in the domain name, 3 characters for $640/year, 4 characters for $160/year, 5 characters and above for $5/year, and the average registration price is about $28/year. From the perspective of technical implementation, ENS emphasizes the decentralization of domain name registration, is not subject to any third-party intervention, and implements business logic through smart contracts. From the perspective of governance structure, the ENS project is still controlled by the core team, and governance is reflected in the project revenue returning to the community treasury and the use of funds is decided by DAO voting.

Judging from the data, the short-term hype bubble of ENS is gradually digested, and there is a lot of room for imagination in the long term. Overall, ENS still has a bubble of domain name speculation. The total number of domain names is about 2.35 million, while the actual number of users is about 550,000, and the average number of domain names held per person is about 4. However, from the perspective of the user characteristics of domain name registration, the proportion of merchant accounts holding a large number of domain names in the total transaction volume is gradually decreasing, and more and more are ordinary users with a small number of domain names. In the long run, Ethereum has 5 to 10 million monthly active addresses, and the revenue scale of ENS still has room for development. From our perspective of tracking Web3, ENS is expected to become another phenomenal application after Opensea, and it has the significance of a lower-level account, so there is a lot of room for imagination.

Competition in the Web3 domain name market is intensifying, and secondary transactions are worth looking forward to. The competition in the Web3 domain name service track is stimulating. According to PANews statistics, there are currently 16 domain names on the public chain, including both single-chain solutions and multi-chain domain name services. However, domain name registration requires globally consistent records and default compatibility of the ecosystem, which has the characteristics of a monopoly market. It is recommended to pay attention to the head projects. Web3 domain names use NFT as a carrier, which solves many problems in the transfer of domain names in the past and makes domain name liquidity stronger. At the same time, due to the characteristics of an open ecosystem, any platform and user can build their own secondary trading applications. The traditional domain name secondary market only accounts for about a quarter of the primary market, while the importance of the secondary market in the NFT ecosystem is much higher. Whether it is entrepreneurship or investment, the secondary transaction of Web3 domain names is very worthy of attention.

Risk warning: code vulnerability risk; blockchain policy supervision risk.

Preface

Decentralized digital identity is another key component of the development of the metaverse after digital assets. In the previous report, we discussed that DID is the core component of the metaverse. The identity model of the traditional Internet, which is fragmented and lacks user control, can no longer meet the development of the digital world. Decentralized identity DID will serve as an important infrastructure direction for the metaverse. In our metaverse model, digital assets have begun to be accepted by users as NFTs have become popular, and digital social relationships centered on digital identities will be the second half of the metaverse.

A name is the first step to an identity, and a domain name is the cornerstone of the digital identity ecosystem. Although decentralized identity is still in the exploratory stage, blockchain domain names, led by ENS, have basically matured in technology and business, becoming one of the infrastructures of the blockchain ecosystem. Compared with our common domain names, what are the differences between domain names in the Web3 era? What user needs does it serve? How does it work?

The traditional domain name market is saturated, and Web3 domain names meet new user needs

Traditional domain names are centralized device address tables. We can visit Baidu's homepage by entering an IP address such as 104.193.88.77 in the browser, or we can visit it by typing baidu.com. In the earliest days of the Internet, users directly used IP addresses to access remote hosts; as the number of hosts increased, each computer used independent host table records (Hosts, used to record the mapping relationship between hosts and IPs in the network); but as the number of networked machines increased exponentially, the update and synchronization of host tables became a big problem. So, in 1983, Paul Mocapejos invented the domain name resolution service and domain name system, and on January 1, 1985, the world's first domain name nordu.net was successfully registered. DNS is responsible for domain name resolution, one of the core infrastructures of the Internet.

DNS resolves domain names through "hierarchical" queries. By accessing the DNS server and querying the distributed database, the host's domain name (such as www.baidu.com) can be converted into an IP address (104.193.88.77). The DNS system is also a tree structure, and domain names of different levels are resolved by different domain name servers. The whole process is "hierarchical". A domain name must first be resolved by the root database before it can be transferred to the top-level domain name server for resolution. This is somewhat similar to asking for directions in life. For example, in the query of 360.cn, the root domain name server gives the address of the top-level domain name server responsible for .cn queries, and the cn top-level domain name service gives the address of 360.cn.

The operation of the ecosystem requires three participants: ICANN, domain name management agencies, and domain name registrars. From the user's perspective, users directly contact domain name registrars, such as HiChina, GoDaddy, and Cloudfare. They purchase domain names from registrars, who manage and assist in resolution, as well as handle many matters during use. Domain name registrars are corporate organizations responsible for the commercialization of domain names. They need to wholesale domain names from domain name management agencies and provide domain name services to make profits. Domain name management agencies manage top-level domain name resolution, such as .com, .org, .cn, etc. Domain name management agencies are certified and managed by ICANN. ICANN (Internet Corporation for Assigned Names and Numbers) is a non-profit organization responsible for providing infrastructure for the Internet and managing root domain name servers to ensure that all addresses are unique and that users can find valid addresses.

The traditional domain name market is close to saturation. With the rapid development of the Internet, the domain name market has grown rapidly in the past 20 years, but it is now close to saturation. According to data from the China Academy of Information and Communications Technology, as of the end of 2020, the global domain name registration market size was 374 million, and the Chinese domain name registration market size was 43.008 million, of which the new generic top-level domain (gTLD) domain name registration market size was 31.252 million and 7.181 million, respectively, a certain decrease from the previous year.

In the Web3 field, another type of domain name is emerging. Account names of "xxx.eth" are increasingly common in our social networks, including many influential social accounts. This form of name is "Ethereum domain name", a new form of domain name. Compared with traditional DNS domain names, what is the difference between domain names in the Web3 era?

ENS vs. DNS: Understanding Web3 domain names from four perspectives

Compared with DNS, taking ENS as an example, the differences in Web3 domain names are mainly reflected in four aspects: different objects, different methods, different carriers, and different ecosystems.

1) Different objects: server address vs wallet address

From the perspective of mapping objects, DNS maps servers and ENS maps wallet addresses. Compared to a long random wallet address, ENS provides a definable human-readable name (for example, 'yourname.eth' maps to "0x01486C3891761E93e5107890286ABdC1834fC6d7"). Users can map blockchain addresses through ENS, which greatly facilitates operations such as user transfers and transactions. Behind the wallet address can be a single user, an organization, a corporate entity, a blockchain project, etc. ENS provides names for digital entities.

2) Different approaches: centralization vs decentralization

ENS uses a decentralized approach to record and resolve domain names. In DNS, there are two ways to prove that you own a domain name: query domain name registration information and registrar account search. For second-hand domain name transactions, Web2 domain names can only be proven through records on the website of domain name registrars (such as Godaddy). This centralized server is vulnerable to hacker attacks and data loss, and there are certain security risks. In addition, DNS domain names are not completely controlled by users, and authorities and registrars can easily cancel user usage rights. ENS domain name records are on-chain, and any application or user can easily query and interact.

3) Different carriers: authoritative accounting vs. NFT

ENS records domain name ownership through NFT and uses NFT infrastructure. As an NFT, ENS naturally has advantages that traditional domain names do not have, including: blockchain-based transactions ensure transaction security. Low commissions. Taking Opensea, the largest NFT trading platform at present, as an example, the handling fee for selling NFTs is only 2.5%. The transaction procedures are simple. Buyers and sellers only need to go to the NFT trading platform, use the Web3 wallet to connect, and then select the desired domain name to place an order. In the traditional domain name market, the process of secondary transactions is cumbersome, and the security and fees are not satisfactory. The market lacks standardized liquidity infrastructure, and often requires intermediaries to match and charge a lot of commission fees. At the same time, there is a certain risk of default, and cross-regional transactions will have the problem of difficulty in protecting rights. Taking Godaddy, one of the largest second-hand domain name trading platforms at present, as an example, it is necessary to pay about 20% of the platform commission to sell domain names.

4) Different ecosystems: permissioned vs. open

The open construction of Web3 domain name ecology can attract more participants. In the DNS ecology, ICANN is the authoritative organization responsible for domain name resolution. Participants need to obtain ICANN's permission, and there is a certain entry threshold. In Web3 domain names, domain name records and resolution based on smart contracts allow everyone to participate in ecological construction, such as building their own domain name trading website, domain name query services, etc. This open construction is also one of the core spirits of the Web3 industry.

Human-readable identifiers, Web3 domain names are the cornerstone of DID

Zooko's triangle paradox: decentralized identifiers and readability are difficult to achieve at the same time. In Internet identifiers, the "Zooko's triangle paradox" refers to the difficulty of achieving the three characteristics that the names of participants in network protocols should have at the same time:

1) Human readability. Provide meaningful, memorable names to users.

2) Security. The damage that a malicious entity can cause to the system should be as small as possible.

3) Decentralization. Names correctly resolve to their respective entities without the use of a central authority or service.

The Zooko conjecture is a summary of reality. For example, DNS achieves human readability and secure access, but it is centralized. Although wallet addresses achieve decentralized reliable identification, they lack human readability. Although .onion addresses are secure and decentralized access addresses, they also lack readability.

Web3 domain names make identifiers human-readable, which is the key to the development of DID. Decentralized identifiers are the key to digital identity. Decentralization means that the mark of this identity is reliable and will not be centralized, tampered or erased. Human readability is the key to the development of social networks. Not only machines need to know "who the user is", but people also need to know. This demand is reflected in the pictures of NFT as a symbol of identity. ENS can solve the Zooko triangle very well. ENS is human-readable, which ensures its decentralization and security. Although it is still in the early stages of the ecosystem, some potential application scenarios can already be seen.

Domain names are used as nicknames for social accounts to connect Web2 and Web3. Traditional wallet addresses are complicated and easy to make mistakes. No one would use a long string of numbers and letters as their social facade. Blockchain wallet addresses with their own names make it easier for people to show themselves. More and more Twitter celebrities are starting to use eth as their Twitter names. For example, Ethereum founder Vitalik changed his Twitter account to vitalik.eth. This action connects Web2 and Web3 accounts. Not only can you browse the historical content of Vitalik's account, but you can also query various behaviors on his address.

The domain name is used as a personal web address and is accessed through a browser. ENS can support users to deploy Web3.0 websites on IPFS and resolve the address through the ENS domain name. In addition, ENS also integrates all DNS domain names. Users can import traditional DNS domain names (such as google.com) into ENS and use the same functions as ENS. In addition, ENS also supports the EIP 1577 specification, which can store content hashes of IPFS/IPNS, Swarm, Onion, SIA and other addresses, and ultimately achieve complete decentralization of traditional domain names and Web3 domain names.

Domain names are a collection of personal identity data and a business card for Web3. Information integration can also be performed on traditional Web2 websites, but the difference is that Web2 website servers are centralized, and the decision-making power of information lies with the website rather than the user. However, through IPFS integration, users can establish personal decentralized website accounts, combining ENS names, NFTAvatar avatars, Web2 social media such as Github, Twitter, Discord, and other information such as content hashes of tax payment records to achieve the integration of identity information data. Users can even print ENS names as their business cards for offline communication, further connecting online and offline identity authentication.

ENS Ethereum Domain Name Service, Web3 Infrastructure in DAO Mode

The number of ENS registrations is growing rapidly, and decentralized domain name infrastructure deserves attention. Ethereum Domain Name Service is a distributed, open and scalable domain name service protocol based on Ethereum, providing users with Ethereum domain name related services. You only need an Ethereum account to purchase a domain name and bind it to your account. Currently, more than 400 mainstream Ethereum projects support ENS resolution. When users access Web3 applications such as Uniswap and Etherscan, they can see that their account is no longer a long string of address symbols, but the domain name they chose to purchase.

Recently, the number of domain name registrations on ENS has exceeded 2.35 million, doubling the number of registrations in May. Ethereum domain name services are beginning to be used by more and more Web3 users. What is worthy of attention in the business model and operating mechanism behind it?

ENS DAO — How does the decentralized naming service work?

In terms of business revenue, ENS charges a fixed annual fee based on the length of the registered domain name. Currently, ENS charges according to the number of characters in the domain name, 3 characters for $640/year, 4 characters for $160/year, and 5 characters and above for $5/year. The registration fee is currently set by the team, and the price oracle is set to quote the smart contract. The account owner can renew the domain name at the original fee. When the domain name is overdue for more than 90 days and is not renewed, it will enter the auction mode, and the price will automatically drop in the auction. In terms of registrable domain names, ENS only supports domain names with 3 characters or more. According to the data in August, the revenue of 5 characters and above is about 2.8 million US dollars, accounting for 60.3%; the revenue of 4 characters is about 800,000 US dollars, accounting for 16.5%; the revenue of 3 characters is about 1.1 million US dollars, accounting for 23.2%. In addition, ENS has no other income.

From the perspective of technical implementation, ENS emphasizes the decentralization of domain name registration and is not subject to any third-party intervention. The main functions of ENS are mainly implemented by three smart contracts to realize business logic, with open source code and transparent process. The registrar contract is mainly responsible for recording key information such as domain name ownership, term, and resolver, and is controlled by users in the form of NFT to protect user ownership. The resolver mainly implements the resolution of domain names to addresses, while the controller is responsible for business logic such as domain name sales and updates. Through oracle quotations, users interact with contracts to complete the process of paying and obtaining domain names. The distinction at the contract level is to ensure decentralization, in which the registrar is as simple as possible and does not change, but the controller and other front-end business-oriented contracts will not affect the security of ownership when upgraded according to market conditions.

From the perspective of governance structure, the ENS project is still controlled by the core team. Governance is reflected in the fact that the project income belongs to the community treasury and the use of funds is decided by DAO voting. The project took a snapshot of the contract interactions before October 31, 2021, and used this as a basis for airdrops, of which 25% was airdropped to users who held domain names at the time, 25% was airdropped to hundreds of contributors (of which 18.96% belonged to 11 core members), and the remaining 50% belonged to the community treasury. ENS has no external financing except for the sponsorship of the Ecological Foundation, so there is no proportion of investment institutions in the airdrop. The treasury income mainly consists of two parts: the first is the airdrop part, which will be gradually unlocked and sold for project development within 4 years; the second is that the project's income belongs to the treasury, and the community jointly proposes and votes to support the activities of the ENS ecological project, such as sponsoring ecological projects, holding offline events, hackathons, etc.

Interpreting ENS from the perspective of business model: Domain name business builds a safety margin, and traffic entrance brings ecological imagination

From the perspective of business revenue, domain name revenue with user stickiness builds a safety margin for the project. ENS charges a fixed annual fee for a single registered domain name, which varies according to the length of the characters. The average annual revenue of the project is [domain name registrations × average annual registration fee]. The average annual domain name revenue in the past year is US$27.3. The current registration volume is about 2.35 million, and the annual revenue is about US$64.15 million. The domain name business has strong stickiness, and ENS domain names map identities. With the development of digital identities, this stickiness will increase.

As a traffic entrance, the domain name business brings imagination to the development of the ENS ecosystem. DNS domain name registrars often rely on domain names as a traffic entrance to develop other businesses. For example, Cloudfare provides security services for website building and only sells domain names at wholesale prices. While providing users with full-process domain name services, Godaddy also provides a complete set of tools for enterprise information operations. After purchasing a domain name, users can quickly choose convenient value-added services such as website deployment and email establishment. As a well-known DNS domain name service provider, GoDaddy's domain name service revenue currently only accounts for 47% of its total revenue. The same is true for ENS. In addition to the core function of selling domain names, ENS is also developing mobile terminals. A set of mobile domain name management and query applications may not be so far away from the social address book of Web3.

Interpreting ENS from data: short-term digestion of bubbles, long-term huge space

Judging from the transaction structure, the hype bubble is being digested and the actual number of users is beginning to expand. Overall, ENS still has hype. The total number of domain names is about 2.35 million, while the actual number of users is about 550,000, and the average number of domain names held per person is about 4. According to Dune@andrewshvv, comparing the transaction volume of domain name merchants with that of ordinary users, the transaction volume of ordinary users is steadily increasing, which means that more registered users are ordinary users or new users with fewer domain names. As the application scenarios of domain names are further expanded, the proportion of domain name speculation will further decrease.

Judging from the overall industry data, ENS has a large room for growth and will steadily benefit from the expansion and expansion of Ethereum. In the long run, the number of ENS users will account for a certain proportion of the number of Ethereum users, and this proportion is affected by the importance of the digital identity ecosystem. Due to the anonymity and decentralized generation of Ethereum addresses, there is no clear number of users, and the number of active addresses is often used. Ethereum had 6.7 million monthly active addresses in August, and about 50 million active addresses for the whole year of 2021. ENS currently has 550,000 users and 2.35 million registered domain names. Compared with the tens of millions of Ethereum users, there is still nearly ten times the room for growth. As Ethereum expands and the influence of Web3 gradually expands, ENS will steadily benefit from the growth in the number of Ethereum users.

Compared with traditional domain name registrars, ENS has a promising future. In the future, we can focus on three important growth points: (1) Ecological expansion based on domain name business, whether it can rely on the entry advantage of domain name business to strengthen the ecosystem; (2) The proportion of Ethereum users holding, whether it can become a rigid demand of Ethereum users; (3) The number of new users brought by Ethereum's out-of-circle and Layer2 expansion. At the same time, we believe that the community treasury in the ENSDAO token mechanism is more like a regular issuance plan in the future, and should not be fully calculated in the total market value.

Future Outlook of Web3 Domain Names

Competition is fierce, and domain name registration is easy to monopolize. The competition in the Web3 domain name service track is stimulating. According to PANews statistics, there are currently 16 domain names on the public chain, including both single-chain solutions and multi-chain domain name services. Among them, the number of registrations for UnstoppableDomains reached 1.9 million. In the DNS era, domain names are authoritatively managed by ICANN, and there are also domain names that are not under its jurisdiction, but other applications in the Internet ecosystem often cannot recognize non-ICANN registered domain names. Domain name registration requires globally consistent records and default compatibility of the ecosystem, which has the characteristics of a monopoly market. It is recommended to pay attention to the head.

NFTization and secondary transactions are worth looking forward to. Web3 domain names use NFT as a carrier, which solves many problems in the past domain name circulation and makes domain name liquidity stronger. At the same time, due to the characteristics of an open ecosystem, any platform and user can build their own secondary trading applications and provide personalized services, further promoting liquidity. At present, ENS has also seen similar gameplay such as 3digitDAO (that is, dao for 3-digit domain names). The combination of NFT and domain names has brought space for gameplay exploration.

Risk Warning

Blockchain policy and regulatory risks: Blockchain is currently in its early stages of development. There is a certain degree of uncertainty in the regulation of blockchain technology, project financing, and tokens in countries around the world, so there is uncertainty in the development of industry company projects.

The development of decentralized digital identity is not as expected: Decentralized digital identity DID is currently in the industry's exploration stage. Although market demand is prominent, there is uncertainty as to whether DID solutions can be widely adopted by users.

The number of real Ethereum users is lower than expected: The anonymity and decentralized generation of Ethereum accounts (key pairs) make it difficult to count the real users behind them. One person can control more accounts through scripts, so the number of active addresses and addresses with non-zero balances may not truly reflect the number of real Ethereum users. The business development space of Web3 domain name services is directly affected by this factor.

Author: Song Jiaji and Tang Yao, Jishi Communications

Original article: From DNS to ENS, the Web3 era of domain names