Domain Name Systems on Blockchain — a “Vitamin” or “Painkiller” ?
Tags: Startup, Bitcoin, Ethereum, Cryptocurrency, Blockchain

Recently, the ICOscoring team found several projects in a new field, previously not profoundly explored — the field of domain names on a blockchain. Not entirely covered by the media, this sector attracts many investors who want to know the size of the market and the fair market cap of this type of projects.

Technology overview

Wallet addresses, or public keys, are long hexadecimal sets of numbers and letters. Because of their length and complexity, it is almost impossible for a human to remember even one public key. That is why it is always necessary to copy and paste wallet addresses to make transactions. As a result, cryptocurrency mass adoption occurs at a much slower pace.

The new protocols that allow creating DNS-like names for cryptocurrency wallets are developed to solve the problem. This type of protocol has already been developed in the Ethereum space and is named ENS.

Using ENS, it is possible to send cryptocurrencies to a simple, human-readable address, such as “johnsmith.eth,” instead of a long random set of numbers and letters, such as “0x55b3d0hs6294xsqot1270odq47c”

The introduction of these protocols can make the transactions in cryptocurrencies simpler for a final customer.

This class of projects has started getting attention in other blockchains.

Recently, a similar protocol was announced on the NEO blockchain. The protocol was named NNS. Another related project is IOV. In addition to human-readable names, IOV also aims to simplify transactions across different blockchains by introducing an intermediary address system. NXT Aliases, Coin by EmerCoin, and PassCard are working on somewhat similar products.

Market sizing

There is no doubt that the projects in this segment could be drawn on when the time comes.

Then it gets necessary to evaluate the size of the market for this type of projects. The rule of thumb here will be Ethereum ENS. Ethereum ENS allows the buying of “.eth” domains via Vickrey auctions. Now, the service only provides for the buying of names longer than seven figures. It is expected, however, that in the next two years, the system will emerge and will allow the buying of shorter names.

Let us have a look at the pricing strategies used in ENS.

An ENS auction starts from a 72-hour bidding period. When all the bids are submitted, the participants have another 48 hours to reveal their bids. The highest-bidding participant wins the auction and has to freeze the second-best price in a smart contract. The difference between the first and the second bid is refunded to the winner right after the auction. The money is kept in a smart contract for one year and can be returned to the winner after expiration.

All participants who lost the auction have to pay a commission of 0.5% of the submitted bid.

If there is only one participant in the auction, one automatically wins the auction and pays 0.01 ETH, which is the smallest possible bid.

The domain can be put on sale at any time. It should be noted, however, that this pricing approach is temporary and is subject to change in the next two years.

Since ENS launch in May 2017, more than 750K auctions had been initiated, and now, there are more than 212K names registered in the ENS system. As a result, more than 170 thousand ETH is locked in smart contracts, which is ~$100 million (as of ETH price on June 22st, 2018).

Using the official ENS statistics, the number of collected fees since the launch can be estimated at around $1.5 million. It should be noted that this number does not account for additional fees collected from reselling domains on the secondary market via DomainSale. After these simple calculations, it can be seen that the ENS market potential is equal to tens of millions of dollars.

Here is just a shortlist of the most expensive names in ENS system.

· darkmarket — 20000 ETH (approx. $12 million)

· openmarket — 10000 ETH (approx. $6 million)

· exchange — 6600 ETH (approx. $3,8 million)

· blackjack — 5900 ETH (approx. 3,4 million)

At the same time, more than 1600 addresses own more than ten addresses each. This suggests that the purchase of “.eth” addresses is often made for a future reselling activity.

Case study: Fair value of NNS — a domain service build on NEO blockchain

According to rumors, NNS raised around $3 million during its private sale by selling 10% of its tokens. Let us try to estimate the fair value of these tokens.

The NNS tokens will be used for purchasing domain names on the NEO blockchain. That is why we can use Ethereum ENS as a proxy for NEO NNS, adjusting to the scale of the latter.

NEO market cap is 22 times smaller than the Ethereum one. Therefore, with some simplifications, we can assume that for the same domain names on NEO the customers will be ready to pay 15x times less money when compared to ENS, which is equal to $6,6 million. On average, there are three bids made for each name on ENS. As a result, we can estimate the total amount of bids on NNS during the first year around $20 million. The winner pay it’s all bid, all other bidders pay 5%. We estimate the growth rate of 20% and apply the discounted rate equal to 30%. As a result, according to the Gordon model, we could expect the fair market price per NNC token equal to $0,00733.

As a result, the whole token cap sold at the initial price will be required only to meet the demand for the names sold during the first year. That is why it is expected that the token price will significantly grow.

Moreover, the platform will take 10% commission from each bid. These fees are collected in a particular pool which is automatically distributed among NNS token holders. This can additionally drive up the token price.

Conclusion

We saw the potential market size of domain names on blockchain and the vast impact these services can have for the mass blockchain adoption. The main risk in this field, though, will be unclear market size valuation and weak traction of the comparable projects.