Amazon.eth, Starbucks.bitcoin, Coke.dao? Crypto domains are the next big NFT craze

What happened

Web3 domain name services such as Ethereum Name Service (“ENS”) and Unstoppable Domains have experienced a large increase in interest and adoption in recent months. ENS just became the top Ethereum project on the leading NFT marketplace, OpenSea, in terms of seven-day trading volume, beating out mainstay NFT pools such as Bored Ape Yacht Club (BAYC), CloneX and Moonbirds.

ENS is the leading decentralized domain name registry service. The platform enables users to register domains issued on the Ethereum blockchain that are programmable and interact with other Ethereum-based decentralized applications (“dApps”). ENS domains can be used as the user’s digital identity, storing usernames, fungible and non-fungible tokens and assets, NFT avatars and other profile data to be used across dApps in the crypto-enabled Web3 ecosystem. Since they use the ERC-721 token standard, ENS domains can also be traded as NFTs, with the vast majority of their trading activity on OpenSea and LooksRare.

To date, over 2.2 million total ENS names have been created among 546,000 unique users. Over the past seven days, ENS recorded 2,565 ETH ($4 million) trading volume on OpenSea, which was higher than BAYC’s 1,934 ETH ($3 million), Otherdeed for Otherside’s 1,767 ETH ($2.8 million), and CLONE X’s 1,353 million ETH ($2 . ).

Another popular Web3 domain name service is Unstoppable Domains. Unstoppable Domains works similarly to ENS, but offers support for multiple top-level domain nameservers. While ENS domains only follow the naming convention “name.eth”, Unstoppable Domains allows users to purchase domain names that may include top-level domain servers such as “name.crypto”, “name.wallet”, “name.nft”, “name.dao”, “name .bitcoin”, among others.

Since launching the platform in 2019, the Unstoppable Domains community has registered over 2.5 million total domains, transacted $80 million in primary sales, and the project supports over 275 tokens and 370 applications.

Broader context

New Web3 applications in gaming, metaverse, DeFi, DAOs and social media require decentralized identity management and non-custodial wallets that can integrate seamlessly into these digital environments. Domain name services have proven to be a breakout use leveraging human-readable names, simplifying the user experience as users can store their tokens and digital assets on non-custodial wallets and interact with Web3 dApps.

Instead of copying and pasting 42-character hexadecimal strings (ie “0x0CCfA1c…”), which represent wallet addresses for blockchains like Ethereum, Web3 domain name service providers enable users to easily send tokens and interact with human-readable name addresses that “cool”. eth” or “kathy.crypto” from their preferred crypto wallet. ENS and Unstoppable Domains have integrated with leading wallets, exchanges and dApps including Metamask, Rainbow Wallet, Brave Browser, Opera Browser, Trust Wallet, 1inch, Moonpay and many others.

Once purchased and registered through the ENS main portal, ENS domains can be traded freely among ETH wallets on the secondary market, via NFT marketplaces such as OpenSea.

The increase in domain name trading activity comes at a time when the broader NFT markets have weakened. OpenSea’s monthly trading volume has fallen sharply, reaching $500 million in trading volume in August, which is a 90% drop compared to January’s trading volume of $4.86 billion. In the same period, ENS monthly name registrations have increased by 465% from 67,000 new registrations in January to 379,000 in July.

It is also worth noting that domain name registrations are not exclusive to Ethereum. There are similar services that also support some of Ethereum’s biggest competitors.

Key quote

“I’m most excited about how NFT domains can become your only name for Web3 that allows you to own your digital identity. In the future, your NFT domain will allow you to carry your reputation across all your favorite apps, games and metaverses, all without giving up control of your data.” – Sandy Carter, SVP and Channel Manager, Unstoppable Domains

Prospects and implications

Investors and speculators have bought popular domain names as potentially lucrative investments. The hope is that companies and existing brands will want to acquire their associated domain name if they want to establish a presence in Web3. Recently, an anonymous buyer made a $1 million bid for the ENS domain “Amazon.eth”. This bid came shortly after both “Samsung.eth” and “Starbucks.eth” were sold for 60 ETH (~$90,0000).

This activity is reminiscent of the domain name squatters of the Dotcom bubble era of the 1990s, where speculators would hoard popular keywords and brands’ domain names in the hope of flipping them for a profit. For example, the Ethereum address that owns “nike.eth” has collected 131 ENS domain names, including the domains “sony.eth”, “coke.eth”, “strawberry.eth” and “nose.eth”.

As is typical of many Web3 projects, ENS launched its own fungible governance token, called ENS. The ENS token was first launched in November 2021 and retroactively granted .eth holders, consisting of 137,000 accounts at the time. The token is used to submit and vote on governance proposals, with one proposal requiring the support of 100,000 tokens (or 0.1% of the total supply) before being put up for a vote. These proposals may affect ENS domain pricing, treasury fund management and other protocol parameters.

One such proposal increased the starting price for temporary premium domain names from $2,000 to $100,000 when a name expires. This change prevented bots from quickly buying premium domains when they expired, before the owner had a chance to renew her registration. Another proposal that was successfully executed awarded 200,000 ENS tokens to the Protocol Guild, for the past and ongoing work of these core contributors to the ENS protocol. By providing governance rights, ENS tokens act similarly to shareholder rights, which act as the primary driver of the token’s value.

The dramatic increase in .eth domain name registrations has seen ENS outperform ETH in the past three months by more than 40%.

Decision points

It remains to be seen how valuable programmable, censorship-resistant and decentralized domain names will be, as well as whether they will truly serve as the primary way for users to manage their digital identities. Platforms such as ENS and Unstoppable domains offer unique advantages over the traditional DNS system by providing stronger property rights and being less vulnerable to security breaches. This will directly affect the value of tokens such as ENS.

For investors who express that Web3 domain name services will provide key infrastructure that enables broader user growth and adoption within Web3, they have a couple of other ways to gain exposure. Similar to the Dotcom era, investors can pre-purchase premium domains outright that they believe may be valuable in the future. A safer bet might be to buy tokens for the underlying platforms themselves, for example ENS.

Competing domain name services such as Unstoppable Domains, Avvy Domains and Space ID have not yet launched their own token, but they may choose to use a similar strategy of retroactively sending tokens to existing domain holders. In the case of ENS, the average token reward for existing users was ~$15,000 at the time of the airdrop.

To determine which domain name service provider to support, investors can review the list of applications and partners supported by each of these platforms. Domain name service providers that are able to achieve the highest quality and the greatest number of application integrations will offer the most utility and gain network effort to emerge as the standard in the Web3 space.

The potential utility decentralized domain names will provide participants in the Web3 ecosystem has not yet been fully realized. However, it is clear that users still face significant friction to fully engage with the emerging Web3 crypto-economy, due to issues around user experience and security. Decentralized domain name providers solve at least one pain point by making it easier to identify and interact with other users in the Web3 world.