In search of a Better Fee Mechanism for Blockchain Name Services
Introduction
Fuel Nomen is the blockchain name system of the world’s fastest modular execution layer, Fuel Network. This article will focus on the novel ownership model and the fee mechanism of Fuel Nomen. But before we dive into that, let’s first understand what a blockchain name system is.
In the early days of the internet, the Domain Name System (DNS) was created to map human-readable names to IP addresses (e.g., 192.168.1.1). The purpose of this mapping is to make it easier for users to access websites. When you type an internet address into your browser and hit enter, the browser sends a query to DNS servers to get the IP address associated with that domain name. It then retrieves the webpage served at that IP address. Without DNS, we would have to remember the IP addresses of all the websites we visit, which would make using the internet much more difficult.
Blockchain name systems (BNS) work in a similar way to DNS, but they map human-readable names to blockchain addresses (such as 0X123abef) instead of IP addresses. This makes the blockchain experience more user-friendly, as users don’t have to deal with long hexadecimal addresses. For example, when Alice wants to send crypto assets to Bob, she can simply type Bob’s domain name, such as “bobby.eth,” into her wallet. Behind the scenes, the wallet queries the mapping stored on the blockchain, translates “bobby.eth” to “0x123abef,” and then creates the transaction.
History of Blockchain Name Systems
Namecoin
Namecoin is the first blockchain name system, created by forking the bitcoin client and implementing DNS on top of it. However, it does not fit the definition of a blockchain name system as outlined above. Instead, it was designed to create a decentralised alternative to the traditional domain name system (DNS), mapping IP addresses in a decentralised fashion. It is worth mentioning that Namecoin was created in the early days of Bitcoin in 2011, and the idea of a decentralised, censorship-resistant version of DNS was as exciting then as it is today. However, it did not achieve widespread adoption and remained within the circle of cypherpunks.
Ethereum Name Service
Ethereum Name Service (ENS) is a decentralised naming system for the Ethereum blockchain. It allows users to own human-readable names that can be used to identify Ethereum addresses, smart contracts, and other blockchain resources. ENS names are unique and are registered on the Ethereum blockchain, making them secure and decentralised.
ENS names are similar to domain names in the traditional internet, but they are specifically designed to work with the Ethereum blockchain. They use the .eth top-level domain (TLD) and can be used to replace long and complicated Ethereum addresses with short and easy-to-remember names. For example, instead of sending a transaction to the Ethereum address “0x1234567890abcdef1234567890abcdef12345678”, you could send it to “mywallet.eth”.
In order to have an ENS name, you need to pay fees. Those fees are determined according to the character number of the domain. According to the ENS docs, 5+ character ENS names cost $5 in ETH, 4 character ENS names cost $160, and 3 character ENS names cost $640 per year currently.
Unstoppable Domains
Unstoppable Domains (UD) is a blockchain-based naming system to create unique, human-readable names that can be used to identify and interact with decentralised applications (dApps), smart contracts, and other blockchain-based resources similar to ENS. Unlike ENS, UD offers multiple top-level domains like “.crypto”, “.nft”, “.wallet”, and more.
One of the main differences between Unstoppable Domains and ENS is you don’t have to pay renewal fees. Instead, there is only a one-time fee at first. Even though this approach may look very appealing in the short term, it damages the system’s sustainability, which we will discuss in the next section.
Economic Problems of Blockchain Name Systems
Sustainability Problem
Blockchain name systems have a sustainability problem since their ownership models. In most blockchain name systems, the ownership of a domain can be given for an infinite time, which means that the owner has the ability to hold onto the domain indefinitely, even if they are not actively using it. Unfortunately, this can result in a large number of unused domains, as some owners may be unwilling to sell their domains, even if they are not being used. For instance, I can buy “nike.eth” before Nike, pay 100 years of fee, and irrationally never sell them even if it would make me better off.
The issue of indefinite domain ownership and the resulting potential for a large number of unused domains is not unique to blockchain name systems. It also occurs in DNS. To address this issue, new top-level domains (TLDs) have been introduced, such as “.io”, “.org”, and “.net”, which provide additional options for registering domain names. These alternative TLDs can be seen as a way to bypass the scarcity of certain traditional TLDs and the high cost of purchasing already registered domains. However, this is not very viable in the blockchain context. It is because writing “nomen.com” over “nomen.sh” by mistake would not cost much, but sending a valuable asset to the wrong domain would cost a lot.
Allocative Inefficiency Problem
Today, most of the desirable ENS domains are being held by squatters, who registered the domains early on and are now hoping to sell them at a higher price. It is often assumed that these squatters are motivated solely by profit, and therefore they will sell the domain to anyone who is willing to pay a sufficiently high price. However, this is not always the case. In order to maximise their revenue, a domain seller may hold onto the domain indefinitely, even if it means not making a sale at all.
As shown in the graph, when a domain’s price decreases, a buyer’s likelihood of accepting the offer increases. To maximise their profit, the seller chooses a price that maximises their expected revenue, which is the product of the price and the probability that the buyer will accept that price. If the price that maximises the seller’s expected revenue is higher than the buyer’s valuation, then the sale will not occur.
It is worth noting that this situation creates the most inefficiency when there is a single buyer or a single buyer who has a much higher valuation than other potential buyers. This is often the case in domain name systems, as most domains represent a person, project, or company’s name, and therefore the number of potential buyers is limited. This leads to a situation where the seller’s revenue-maximising price may be higher than the buyer’s valuation, resulting in a failed sale.
Real Value Problem
Currently, the cost of registering an ENS domain is based on the number of characters in the domain name. For example, a 5+ character “.eth” domain costs $5 per year, a 4 character “.eth” domain costs $160 per year, and a 3 character” .eth” domain costs $640 per year. However, the number of characters is not the only factor that determines the value of a domain. For example, a domain like “america.eth” is definitely more valuable to most people than “xyzktcx.eth,” but the owners of these domains would pay the same annual fee in the ENS and other name services that use a character-based pricing model. This means that the cost of owning a domain is not tied to its intrinsic value, and there is no mechanism to disincentivise squatters from holding onto valuable domains by paying low fees.
Solution Concepts
Harberger Tax
Harberger Tax is an economic policy designed to balance private property and common ownership. It helps to ensure that property is more productively utilised by society, resulting in an increase in overall economic productivity and the general welfare of society. In this policy, owners self-assess the valuation of their assets. They have to sell the asset when someone pays their assessed value, and they pay tax according to their valuation. When the valuation increases, they need to pay more tax. So, people will want to assess lower valuations in order to pay less tax. However, when they assess lower valuations, the probability of somebody forcibly buying the asset increases. This mechanism can perform much better than private property from the allocative efficiency perspective.[1]
Applying the Harberger Tax model to the domain fee system could potentially address the issues mentioned above. However, the Harberger Tax system creates a state of instability when applied to domains, which are not interchangeable assets but rather unique and personal identities. For example, someone can forcibly buy my ENS domain and forward any incoming payment to their own wallet. While this may not be a common occurrence, the possibility of suddenly losing ownership of one’s domain is a sufficient reason to not implement a pure Harberger Tax model for domains.
Demand-Based Recurring Fees
The demand-based recurring fee model is a system for determining the annual fee based on the level of demand for the domain in the market. This model was proposed by Vitalik Buterin in an article a few months ago.[2] In this model, the fee is determined based on bids rather than the owner’s valuation. Any individual can place a bid on a domain, which increases the domain’s valuation. The fee for the domain is then proportional to this valuation. When a bid is placed on a domain, the owner has two options: they can reject the bid and pay a higher fee, or they can accept the bid and sell the domain. This risk of the owner accepting high bids can discourage individuals from trying to harm the domain holder by bidding excessively on the domain. Additionally, when there are no bids on a domain, the fee will steadily decrease over time. This model achieves a fair and efficient market by aligning the fee for a domain with the level of demand for it.
When comparing the demand-based recurring fee model to the Harberger tax model, it is important to consider the user experience and the stability of each model. One potential advantage of the demand-based recurring fee model is that it can be more user-friendly because the fees are determined based on bids rather than the owner’s valuation. For example, if Bob owns the domain “bobtheswayoor.fuel” and nobody else values it, Bob may be inclined to assess a high value in the Harberger tax model in order to avoid the risk of someone else purchasing the domain. However, this would result in Bob paying a high fee, even if there is not much demand for the domain. In contrast, under the demand-based recurring fee model, Bob would pay a fee that is more closely aligned with the level of demand for the domain, which may be significantly lower.
However, even in the demand-based recurring fee model, issues with stability can still arise as anyone can potentially force someone to sell their domain. This can occur if a high bid is placed on the domain and forces the owner to sell the domain. This issue may be less pronounced in the demand-based recurring fee model compared to the Harberger tax model, as it is not possible for somebody to buy their domain suddenly like in the Harberger tax model. However, it is still a potential concern that people still have a lot of pressure to be forced to sell the domain.
Capped Demand-Based Recurring Fee
Capped demand-based recurring fee is the second model that Vitalik Buterin proposed.[2] It brings the concept of the strong time-bound ownership guarantee in order to provide more stability. He defines the strong time-bound ownership guarantee as “for any fixed number of years, it’s always possible to compute a fixed amount of money that you can pre-pay to unconditionally guarantee ownership for at least that number of years”. So even if there is a very high bid, the fee cannot pass the “maximum fee”. This concept brings more stability to the demand-based recurring fee model.
In Vitalik’s article, he chooses a maximum fee function with a valuation which changes according to the rejected bids. However, when we take a bid-dependent valuation, then it will not be possible for someone to pre-pay to guarantee ownership. It is because, with a variable valuation, the maximum fee will be able to change. Nevertheless, when we take this valuation as constant(dependent on the selling price), there is another problem. Owners can sell their domain to their another account for very low prices to reset the max fee. We need a mechanism that prevents this situation.
Nomen’s Model
We propose a mixture of Harberger taxation and capped demand-based recurring fee models. In Nomen’s model, when a new Nomen is registered, or its owner is changed, the time-restricted Harberger tax period starts. When the Harberger period ends, Nomen stabilises, and the rules of a variant of the capped demand-based recurring model are applied.
If a Nomen is not registered, anyone can register it by paying the registration fee and assessing a valuation afterwards. After registration, other individuals will have the opportunity to forcibly buy the Nomen during the Harberger period by paying the assessed valuation. Once the Harberger period ends, the Nomen will stabilise and enter the recurring fee period, as we call the Stable period, during which the owner will pay a capped demand-based fee.
The fee to pay at the end of the nth period is going to be determined by the function below:
HighestBid is simply the highest bid on Nomen that has been made since the last Harberger period, elapsedPeriod is the number of periods passed since the highest bid was made, fee ratio is a constant that determines the relation between valuation and fee, decayCoefficient is a coefficient that determines at what rate value will decay, maxFee is function determines the maximum fee defined in next words, value is a function that calculates the current value of a Nomen by multiplication of highest bid and decay coefficient to the power of the number of elapsed periods.
As we can see, the fee cannot exceed the maximum fee in that period, and the maximum fee is going to be determined by an exponential function represented as:
The assessed value is the value assessed at the end of the Harberger period, and the max fee constant is the constant that determines how much the max fee will increase per period.
This mechanism determines the fee based on the demand and allows the owner to maintain ownership as long as they are willing to pay the fee. Other than that, the owner of the Nomen will be able to start a Harberger period anytime he/she wants when the Nomen is in the Stable period. Owners may do that to reset the fee and the maximum fee. However, it is important to remember that anybody can buy the Nomen by paying the assessed value in the Harberger period.
Below, we present an example that explains the model. In order to give a more concrete example, we will take the fee period as one year, the Harberger period as one week, the fee ratio as 0.05, the decay coefficient as 0.5, and the max fee constant as 1.5.
Alice registered “alice.fuel” by paying the registration fee on 01/01/2022. She assessed $100. If nobody buys the Nomen from her in the first week, then the Nomen goes into a Stable period. Then she pays a recurring fee on 08/01/2023. This fee is going to be 5% of the highest bid, but it couldn’t be higher than $7.5 ($5 x 1.5). Also, if there is no bid, then the fee will be $2.5 ($100 x 0.05 x 0.5). In the next year, the same logic will be applied. However, this time the maximum fee will be $11.25 ($5 x (1.5)^2), and if there is no bid, Alice is going to pay $1.25 ($5 x (0.5)^2).
Now let’s consider somebody else buying the Nomen in the first week by paying $100. The buyer will assess a new value. At the end of 7 days, if Alice or anybody else doesn’t buy the Nomen, Nomen will stabilise, and the new owner is going to pay a fee proportional to the assessed value.
Now let’s think Alice wants to sell her Nomen. It is always possible for her to sell the Nomen to a coming bid, or she can list the Nomen in a marketplace. After somebody else buys the Nomen, they will assess a new value, and the Nomen will go to the Harberger period again.
How Nomen’s Model Alleviates the Negative Externalities of the Problems?
Firstly, the fee for a Nomen is determined by the bids made for it in the previous periods. If the Nomen is considered valuable by others, the owner may need to pay a higher fee in order to continue to own it. This model is designed to be sustainable in the long term because the fees are determined by demand rather than being set at a fixed rate.
Secondly, to reduce the problem of squatting, this mechanism employs the Harberger tax initially and a demand-based recurring fee afterwards. In order to understand why this reduces squatting, we can look at an example. Let’s say a squatter registered a Nomen (bob.fuel). After the Harberger period, let’s suppose that another person expresses more interest in the Nomen. In the Ethereum Name Service (ENS) fee model, it is expected that a rational squatter sells the Nomen to someone who has a higher valuation, but this is not always the case, as we mentioned before in the allocative inefficiency problem paragraph. In contrast, Nomen’s model allows the person who has a higher valuation to place a bid to the Nomen, and if the squatter decides not to sell, they will have to pay a higher fee to keep the Nomen. This creates a higher probability that the squatter will accept the bid, as they will incur a higher cost if they choose to retain ownership. Ultimately, this mechanism leads to the Nomen being allocated to the person who values it the most, thereby improving the allocative efficiency.
Nomen’s model is noteworthy for its ability to address the issue of determining the true value of a Nomen through the use of demand-based valuation. This means that Nomen owners will pay fees that more accurately reflect the actual value of their Nomen. Additionally, it is important to underline that this approach enables regular people to pay lower fees, which is not possible in a character-based pricing model like ENS has.
Case Study
In this section, we will examine a potential scenario to further understand how the model will work in practice.
Now let’s consider Bob Nakamoto has registered a Nomen (bobnakamoto.fuel). It is assumed that no one other than Bob Nakamoto is interested in this Nomen. As a result, Bob will pay a relatively low fee to maintain ownership of the Nomen, and this fee will decrease over time. Additionally, it would be difficult for an attacker to try and take the Nomen away because of the maximum fee.
Bob also has the ability to initiate a Harberger period for the Nomen at any time, during which other individuals can buy the Nomen from him by paying the value that Bob assessed when he started the Harberger period. This gives Bob the ability to control when the Harberger period occurs and to be prepared for a potential sale of the Nomen. If no one buys the Nomen during the Harberger period, the maximum fee for the Nomen will reset based on the value that Bob assessed when he initiated the period.
Overall, it seems that Nomen’s model may offer Bob a measure of protection against potential attackers or competitors who may try to take the Nomen from him while also allowing him to reassess the value of the Nomen and reset the maximum fee if necessary.
What if Bob sells his Nomen to his another wallet? It doesn’t make sense because, after a sale, the fees for the Nomen are not determined based on the selling price. Instead, the Nomen will go into the Harberger period, and anyone will be able to buy the Nomen from Bob if he assesses a lower value. This mechanism is important in preventing collusion, as it discourages individuals from selling a Nomen to another wallet at a discounted price.
Summary
Fuel Nomen is the blockchain name system of the Fuel Network. In this article, we have discussed the various problems that can arise with ownership and fee mechanisms in blockchain name systems. These include the lack of sustainability in the current name systems for granting infinite ownership of a domain, the allocative inefficiency of the current fee mechanisms, and the lack of fairness in the approach of current name systems to fees based on domain length. To address these issues, we analysed several potential solution concepts and proposed a model that combines elements of the Harberger tax and the capped demand-based recurring fee concepts.
References
[1]https://medium.com/@simondlr/what-is-harberger-tax-where-does-the-blockchain-fit-in-1329046922c6
[2] https://vitalik.ca/general/2022/09/09/ens.html
[3] https://partialcommonownership.com/
[4] Posner, Eric A. and Weyl, Eric Glen, Property Is Only Another Name for Monopoly (January 31, 2017). Journal of Legal Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2818494 or http://dx.doi.org/10.2139/ssrn.2818494
