One area of the digital asset ecosystem that has continued to see a strong growth trajectory is the Ethereum Name Service (ENS). Founded by the Ethereum Foundation in early 2017, the ENS is a permissionless protocol that serves the Ethereum community as a public good. Nearly ~2.5 million ENS domains have been registered since its inception, generating over ~US$65M in protocol revenue (plus an additional ~US10M from renewal fees). The bulk of this activity, however, has taken place in just the past few quarters as ~75% of total domain registrations occurred in 2022 alone and ~40% occurred in just the past three months. Secondary sales volume for ENS domains (which are tradable as NFTs) has also experienced significant growth recently, with roughly ~43% of the aggregate historical total (~66.4k ETH or ~US$83M at current prices) taking place in just the past 90 days.
At a glance
At the forefront of establishing the infrastructure for decentralized identity today and a prime example of the utility of the technology underpinning NFTs is the Ethereum Name Service (ENS), which allows for the creation and ownership of Ethereum-based domain names.
- Different forms of decentralized identity are aimed at providing internet users with tools that can help protect their sovereignty, privacy and control over their own data.
- Concurrent with the recent growth in new ENS domain registrations (primary sales), the secondary market trading volume for ENS domains has increased meaningfully over the past several months.
- Brian Cubellis, Research Analyst
Origins of decentralized identity
Since the early days of the internet, the concept of namespaces – or online systems that discretely map names to values – have been recognized as a critical piece of infrastructure for the web. Historically, the most prominent of these systems has been the Domain Name System (DNS), which represents a centralized namespace to map internet protocol (IP) addresses to more functional Uniform Resource Locators (URLs). It was not until the advent of blockchain technology that the notion of decentralized namespaces became a real possibility. Zooko Wilcox-O'Hearn (computer scientist and co-founder of Zcash) said in 2001 that the prevailing systems for namespaces to that point suffered from a trilema of optimizing for three core tenets: security, human-meaningful names, and decentralization (Zooko’s triangle). While the DNS offered security and human-meaningful names, the shutdown of wikileaks.org in 2010 and seizures of domain names in 2011 by the U.S. Department of Justice and Department of Homeland Security highlighted the system’s inherent lack of decentralization.
The advent of blockchain technology has enabled the creation of namespaces with all three properties of Zooko’s triangle. Not long after the creation of bitcoin, a discussion began in the BitcoinTalk forum about a hypothetical system called BitDNS which would allow for the creation of censorship-resistant domains (“.bit”) outside the purview of the Internet Corporation for Assigned Names and Numbers (ICANN), the governing body of the DNS. Initially supported by pseudonymous bitcoin founder Satoshi Nakamoto himself, the BitDNS proposal ultimately inspired the creation of Namecoin, the first ever fork of bitcoin. Namecoin offered the same functionality as bitcoin with the addition of a name/value store that could hold arbitrary data, allowing for the creation of censorship-resistant domains and decentralized identities. However, in the absence of an emerging ecosystem of decentralized applications wherein this form of identity could be utilized at scale, there has been very little adoption of Namecoin to date. A study conducted in 2015 found that only 28 of the 120,000 domain names registered on Namecoin were actually in use. Nevertheless, the project fundamentally paved the way for subsequent versions of decentralized naming systems.
Ethereum Name Service (ENS)
At the forefront of establishing the infrastructure for decentralized identity today and a prime example of the utility of the technology underpinning NFTs is the (ENS), which allows for the creation and ownership of Ethereum-based domain names. Functionally similar to the DNS system, the ENS securely transforms machine-readable identifiers into human-readable names like “joe.eth,” but importantly, is able to accomplish this within the context of a decentralized network. The service allows users to create custom domain names (a string of characters followed by “.eth”) in the form of ERC-721 tokens that can be linked to digital wallet addresses or decentralized websites, and traded as NFTs. In practice, this creates a much more user-friendly and frictionless environment for transacting on the Ethereum network, allowing for seamless interoperability across various decentralized applications. Accordingly, both individuals as well as companies/brands operating in the Ethereum ecosystem can benefit immensely from this standardized address naming system which facilitates the usage of decentralized identities.
Chart 1. Monthly ENS domain registrations (with 12-month rolling average trendline)
Digital land grab
Concurrent with the recent growth in new ENS domain registrations (primary sales) shown in Chart 1, the secondary market trading volume for ENS domains has increased meaningfully over the past several months. While there are a handful of plausible explanations for this recent spike in ENS activity, we think the primary driver is the belief among NFT traders that certain subsegments of the ENS universe are inherently scarce. These speculators have focused on subsegments (short character strings, primary names, numbers, emojis, corporation and brand names) that not only have limited supplies, but may also be highly coveted by a single person or entity associated with the content of the specific domain. Two of the most expensive ENS domain purchases to date include “paradigm.eth” (sold for ~US$1.5M in October 2021) and “000.eth” (sold for ~US$315k in July 2022).
One subsegment that has accounted for an outsized portion of the recent secondary market activity is character strings of only numerical digits. Given there are fewer possible permutations for numerical digits relative to alphabetical characters, this subsegment of domains is inherently more scarce than those that include alphabetical characters. Further, practically speaking, numerical digit strings are readily applicable to existing discrete identifiers in the real world such as area codes, zip codes, and phone numbers. Said another way, a random string of numerical digits is more likely to attract a natural buyer in the future than a random string of alphabetical characters. Accordingly, since the initial spike in secondary market volume in late April 2022, ENS domains consisting only of numerical digits (any number of characters) have accounted for an average of ~57% of the total daily secondary market volume for all ENS domains (shown in Chart 2).
Chart 2. ENS daily secondary market volume (digit-only versus other)
More granularly, the subsegments of numerical digits strings with only 3, 4, or 5 characters have been an outsized contributor to overall secondary market volume. In aggregate, these three subsegments account for ~55% of the aggregate historical secondary market volume for all ENS domains. As shown in Table 1, the perceived value of these subsegments (i.e. the current floor price) is directionally attributable to the degree of scarcity for each subsegment. The 3 and 4 digit subsegments are also particularly relevant to NFT market participants who may have a natural desire to own the ENS domain associated with the token number of an NFT that they already own and perhaps use as their online avatar (e.g. the owner of Cryptopunk #1234 could be a natural buyer of the ENS domain “1234.eth”).
Table 1. Attributes of numerical digit subsegments of ENS domains
All ENS domains
% for sale
Historical secondary volume
Domain renewal structure
Currently, the cost to register an ENS domain of 5+ characters is just US$5 and must be renewed at least annually for the same amount (registration and renewal costs for 4 and 3 character domains are slightly more expensive given their relative scarcity, priced at US$160 and US$640, respectively). As shown in Chart 3, ENS domain renewals have been increasing over the past several quarters. While this renewal structure allows for a relatively low barrier to entry for ENS domains, it may have some unintended consequences with respect to longer-term growth and adoption.
Chart 3. ENS daily renewals and aggregate renewal years (30-day rolling average)
Notably, Ethereum co-founder Vitalik Buterin has said this form of “digital land grab” spawned by the ENS platform may not be sustainable over the long-term. In a recent , he suggested potential amendments to the fee structure associated with ENS domains to dissuade domain owners from “squatting” on highly coveted domains. In his view, domain owners need to be incentivized to actually sell their domains in order to perpetuate broader adoption of the ENS standard going forward. Natural buyers would be those individuals or entities that are best suited to make actual use of them (i.e. Nike should probably own nike.eth). Accordingly, Vitalik has suggested the implementation of a variable renewal fee structure, wherein the ongoing costs of domain ownership are a function of the market demand for a particular domain. Instead of a static US$5 annual renewal fee, the domain owner would be subject to a fee based on a percentage (e.g. ~0.5%) of the highest outstanding bid on the domain. This would allow motivated bidders to incentivize the sale of a given domain by increasing the carrying costs for the current owner.
Whether or not the ENS will adopt this proposal remains to be seen, but the continued adoption of ENS domains is critical to the broader adoption of the Ethereum ecosystem and represents a clear demonstration of the inherent utility of NFTs. Moreover, the accessibility and longer-term sustainability of standardized systems for decentralized identity are key to creating an open financial system and truly democratizing the web3 user experience.
While the ENS has built a meaningful competitive moat around its standardized naming system, they are not without competitors. Unstoppable Domains is an identity platform that raised US$65M in July 2022 (from investors including Coinbase Ventures)(at a US$1B valuation) which functions similarly to the ENS and also offers a variety of domain name extensions such as .x, .crypto, .dao and .blockchain. However, unlike the ENS which is a true open source protocol, Unstoppable Domains is a for-profit company and far more centralized than the ENS. Further, the platform is not permissionless in the sense that it will reserve certain domains for specific celebrities or corporations. Nevertheless, Unstoppable Domains has amassed over 2.5 million domain registrations and generated over US$80M in revenue since its inception in 2019. Other key differences compared to ENS include being built on Polygon (making it cheaper to mint new domains) and the perpetual ownership of domains (meaning zero renewal fees). While these nuanced differences may be effective marketing tools to catalyze user adoption in the near-term, the latter is likely to cause the same long-term issues related to domain squatting highlighted by Vitalik.
Different forms of decentralized identity are aimed at providing internet users with tools that can help protect their sovereignty, privacy and control over their own data. In the absence of these tools, the vectors for state-level digital surveillance may increase and the data monopolies inherent to the web2 world are likely to persist. In many ways, combatting these dynamics are the core promises of decentralized protocols that comprise web3.
Decentralized namespaces, like the ENS system, represent critical infrastructure that can allow web3 to truly flourish. Providing crypto users with an identity standard which facilitates trusted interactions and seamless interoperability across the ecosystem of decentralized applications and smart contracts can help catalyze wider adoption of web3 technologies. That said, we believe that the recent spike in ENS activity is primarily a function of scarcity-driven market speculation, rather than a pure reflection of the inherent utility of ENS domains. Further, it is worth considering alternative incentive models for domain renewals, as the current structure has led to domain squatting dynamics which could negatively impact the longer-term trajectory of ENS adoption.