ENS: Decentralized Identity in the Web3 Era

Authors: Song Jiajie, Tang Yao, Jishi Communication

Abstract:

The traditional domain name market is saturated, and Web3 domain names meet new user demands. The domain name market has grown rapidly over the past 20 years but is now nearing saturation. In 2020, the global domain name registration market reached 374 million, a year-on-year increase of 0.7%, while China's domain name registration market reached 43.08 million. In the Web3 domain, another type of domain is emerging, which differs from DNS domain names in terms of mapping objects, resolution methods, record methods, and ecological development. Web3 domain names provide readable names for wallet addresses, which is a demand that traditional domain names cannot meet.

Readable identifiers, Web3 domain names are the cornerstone of DID development. Decentralized identifiers are key to digital identity, but ensuring decentralization and security while maintaining readability is challenging (the Zooko triangle paradox). The readable identifiers enabled by Web3 domain names have significant social implications. In the early stages of the current ecosystem, we can see that when a Twitter name is changed to xx.eth, it bridges the identity gap between Web2 and Web3, allowing users to see all data associated with them in the ecosystem through a single name.

ENS (Ethereum Name Service) is mature in both technology and business, operating infrastructure in the form of a DAO. From a business revenue perspective, ENS charges a fixed annual fee based on the length of the registered domain name. The fees are structured as follows: 3 characters for $640/year, 4 characters for $160/year, and 5 characters or more for $5/year, with an average registration price of about $28/year. From a technical implementation perspective, ENS emphasizes the decentralization of domain name registration, free from any third-party interference, and implements business logic through smart contracts. In terms of governance structure, the ENS project is still controlled by a core team, with governance reflected in project revenues going to the community treasury and funding usage decided by DAO voting.

From the data perspective, the short-term speculation bubble of ENS is gradually dissipating, while the long-term potential is significant. Overall, there is still a bubble of domain name speculation in ENS. The total number of domain names is about 2.35 million, while the actual number of users is about 550,000, with an average domain holding of about 4. However, looking at the characteristics of users registering domain names, the proportion of merchant accounts holding a large number of domain names in total transactions is gradually decreasing, with more and more ordinary users holding a small number of domain names. In the long run, Ethereum has 5 to 10 million monthly active addresses, and ENS's revenue scale still has room for growth. From our tracking perspective of Web3, ENS is expected to become another phenomenal application following Opensea, with significant implications for lower-level accounts and considerable potential.

The competition in the Web3 domain name market is intensifying, and secondary trading is worth looking forward to. The competition in the Web3 domain service track is fierce. According to PANews statistics, there are currently 16 domain names on public chains, including both single-chain solutions and multi-chain domain services. However, domain name registration requires globally consistent records and default compatibility within the ecosystem, which has monopolistic market characteristics, so it is advisable to pay attention to leading projects. Web3 domain names, as NFTs, solve many problems of domain name circulation, enhancing liquidity. Additionally, due to the open nature of the ecosystem, any platform and user can build their own secondary trading applications. The secondary market for traditional domain names 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 for entrepreneurship or investment, secondary trading of Web3 domain names is very worthy of attention.

Risk Warning: Code vulnerability risk; blockchain policy and regulatory risk.

Introduction

Decentralized digital identity is another key component of metaverse development following digital assets. In the previous report, we discussed that DID is a core component of the metaverse. The fragmented identity model of traditional internet, where users lack 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 with the rise of NFTs, while digital social relationships centered around digital identity will be the second half of the metaverse narrative.

Names are the first step to identity, and domain names are the cornerstone of the digital identity ecosystem. Although decentralized identity is still in the exploratory stage, blockchain domain names led by ENS have become technically and commercially mature, serving as one of the infrastructures of the blockchain ecosystem. How do Web3 domain names differ from the traditional domain names we are familiar with? What user needs do they serve? How do they operate?

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

Traditional domain names are centralized device address tables. We can enter an IP address like 104.193.88.77 in the browser to access the Baidu homepage, or we can type baidu.com to access it. In the early days of the internet, users accessed remote hosts directly using IP addresses; as the number of hosts increased, each computer maintained an independent hosts table (Hosts, used to record the mapping of hosts to IPs in the network). However, as the number of connected machines increased exponentially, updating and synchronizing the hosts table became a significant issue. Thus, in 1983, Paul Mockapetris invented the Domain Name System (DNS), and on January 1, 1985, the world's first domain name, nordu.net, was successfully registered. DNS is responsible for domain name resolution and is one of the core infrastructures of the internet.

DNS achieves domain name resolution through "hierarchical" queries. By accessing DNS servers and querying distributed databases, a host's domain name (e.g., www.baidu.com) can be converted into an IP address (104.193.88.77). The DNS system is also a tree structure, with different levels of domain names resolved by different domain name servers, making the entire process "hierarchical." A domain name must first be resolved through the root database before it can be passed to the top-level domain name server for resolution, which is somewhat analogous to asking for directions in real life. For example, in the query for 360.cn, the root name server provides the address of the top-level domain server responsible for .cn queries, and the .cn top-level domain service then provides the address for 360.cn.

The operation of the ecosystem requires three participants: ICANN, domain management organizations, and domain registrars. From the user's perspective, users directly interact with domain registrars, such as Wanwang, GoDaddy, Cloudflare, etc., purchasing domain names from registrars, who manage, assist in resolution, and handle various matters during usage. Domain registrars are organizations responsible for the commercialization of domain names; they need to wholesale domain names from domain management organizations and provide domain services to generate profits. Domain management organizations oversee the resolution of top-level domains, such as .com, .org, .cn, etc., and 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, managing root name servers to ensure all addresses are unique and that users can find valid addresses.

The traditional domain name market is nearing saturation. With the rapid development of the internet, the domain name market has grown rapidly over the past 20 years but is now close to saturation. According to data from the China Academy of Information and Communications Technology, by the end of 2020, the global domain name registration market reached 374 million, and China's domain name registration market reached 43.08 million, with the new generic top-level domain (gTLD) registration market sizes being 31.252 million and 7.181 million, respectively, showing a certain decline compared to the previous year.

In the Web3 domain, another type of domain is emerging, with account names like "xxx.eth" becoming increasingly common on our social networks, including many influential social accounts. This form of name is known as "Ethereum domain," a new form of domain. How do Web3 domain names differ from traditional DNS domain names?

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

Compared to DNS, using ENS as an example, the differences of Web3 domain names mainly manifest in four aspects: different objects, different methods, different carriers, and different ecosystems.

1) Different objects: server addresses vs. wallet addresses

From the perspective of mapping objects, DNS maps servers, while ENS maps wallet addresses. Compared to a long random wallet address, ENS provides a definable human-readable name (e.g., 'yourname.eth' maps to "0x01486C3891761E93e5107890286ABdC1834fC6d7"). Users can achieve blockchain address mapping through ENS, greatly facilitating operations such as transferring transactions. The wallet address can represent an individual user, an organization, a company entity, a blockchain project, etc., and ENS provides names for these digital entities.

(2) Different methods: centralized vs. decentralized

ENS uses a decentralized approach for domain name recording and resolution. In DNS, proving ownership of a domain name can be done in two ways: querying domain registration information or checking the registrar account. For secondary domain name transactions, Web2 domain names can only prove ownership through records on the registrar's (e.g., GoDaddy) website, which is vulnerable to hacking and data loss due to its centralized nature, posing certain security risks. Additionally, DNS domain names are not entirely under user control, as authorities and registrars can easily revoke user rights. In contrast, ENS domain records are on-chain, allowing any application or user to easily query and interact.

(3) Different carriers: authoritative bookkeeping vs. NFT

ENS records domain ownership through NFTs, utilizing NFT infrastructure. As NFTs, ENS naturally possesses advantages that traditional domain names lack, including: transaction security guaranteed by blockchain transactions, lower commissions (for example, the largest NFT trading platform, Opensea, charges only a 2.5% fee), and simplified transaction processes. Buyers and sellers only need to visit an NFT trading platform, connect with a Web3 wallet, and select their desired domain to place an order. In contrast, the secondary trading process in the traditional domain market is cumbersome, with unsatisfactory security and costs. The market lacks standardized liquidity infrastructure, often requiring intermediaries and charging significant commission fees. Additionally, there are certain risks of default, and cross-regional transactions may face difficulties in rights protection. For example, one of the largest secondary domain trading platforms, GoDaddy, requires about a 20% platform commission for selling domain names.

(4) Different ecosystems: permissioned vs. open

The Web3 domain ecosystem is open for construction, attracting more participants. In the DNS ecosystem, ICANN is the authoritative body responsible for domain resolution, and participants must obtain ICANN's permission, which imposes certain entry barriers. In the Web3 domain, domain records and resolutions based on smart contracts allow everyone to participate in ecosystem construction, such as building their own domain trading websites, domain query services, etc. This open construction is also one of the core spirits of the Web3 industry.

Readable identifiers, Web3 domain names are the cornerstone of DID.

The Zooko triangle paradox makes it difficult to achieve both decentralized identifiers and readability. In internet identifiers, the "Zooko triangle paradox" refers to the three characteristics that participant names in network protocols should possess, which are difficult to achieve simultaneously:

1) Human readability. Providing users with meaningful and memorable names.

2) Security. The potential damage caused by malicious entities to the system should be minimized.

3) Decentralization. Names should correctly resolve to their respective entities without using a central authority or service.

Zooko's conjecture summarizes the reality, for example, DNS achieves human readability and secure access but is centralized; wallet addresses, while achieving decentralized reliable identification, lack human readability; .onion addresses, although secure and decentralized, also lack readability.

Web3 domain names providing human readability for identifiers is key to DID development. Decentralized identifiers are crucial for digital identity, meaning that such identity markers are reliable and cannot be centralized or tampered with. Human readability is key to the development of social networks; not only do machines need to know "who the user is," but people also need to know. This demand is reflected in images where NFTs serve as identity symbols. ENS can effectively address the Zooko triangle, as it possesses human readability while ensuring decentralization and security. Although still in the early stages of the ecosystem, some potential application scenarios can already be observed.

Domain names as social account nicknames bridge Web2 and Web3. Traditional wallet addresses are complex and prone to errors; no one would use a long string of numbers and letters as their social facade. However, blockchain wallet addresses with one's name make it easier for people to present themselves. More and more Twitter celebrities are starting to use eth as their Twitter names, such as Ethereum founder Vitalik changing his Twitter account to vitalik.eth. This action bridges the accounts of Web2 and Web3, allowing users to browse Vitalik's historical content and check various activities associated with his address.

Domain names as personal web addresses accessed through browsers. ENS supports users in deploying Web3.0 websites on IPFS and resolving that address through ENS domain names. Additionally, ENS integrates all DNS domain names, allowing users to import traditional DNS domain names (like google.com) into ENS and use the same functionalities as ENS. Furthermore, ENS supports the EIP 1577 specification, which can store content hashes of addresses like IPFS/IPNS, Swarm, Onion, SIA, etc., ultimately achieving complete decentralization of traditional domain names and Web3 domain names.

Domain names as a collection of personal identity data, the business card of Web3. Traditional Web2 websites can also integrate information, 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, NFT avatars, Web2 social media like Github, Twitter, Discord, and other information like tax records' content hashes to achieve the integration of identity information data. Users can even print their ENS names as business cards for offline communication, further bridging online and offline identity verification.

ENS Ethereum Name Service, a Web3 infrastructure in DAO mode.

ENS registration volume is rapidly increasing, and the decentralized domain infrastructure is worth attention. Ethereum Name Service is a distributed, open, and scalable domain service protocol based on Ethereum, providing users with Ethereum domain-related services. Users only need an Ethereum account to purchase a domain and bind it to their account. Currently, over 400 mainstream Ethereum projects support ENS resolution. When users access Web3 applications like Uniswap and Etherscan, they will see that their accounts are no longer a long string of addresses but the domain names they have chosen to purchase.

Recently, the number of ENS domain registrations has surpassed 2.35 million, doubling from the registration volume in May. Ethereum Name Service is being used by an increasing number of Web3 users, and what aspects of its business model and operational mechanism are worth noting?

ENS DAO------How does decentralized domain service operate?

From a business revenue perspective, ENS charges a fixed annual fee based on the length of registered domain names. Currently, ENS charges based on the number of characters in the domain name: 3 characters for $640/year, 4 characters for $160/year, and 5 characters or more for $5/year. The registration fees are currently set by the team and quoted to smart contracts through a price oracle. Account owners can renew at the original fee, and if a domain is not renewed for more than 90 days after expiration, it will enter an auction mode where the price will automatically decrease. For registrable domain names, ENS only supports domain names with 3 or more characters. According to data from August, revenue from 5-character and above domains was about $2.8 million, accounting for 60.3%; revenue from 4-character domains was about $800,000, accounting for 16.5%; and revenue from 3-character domains was about $1.1 million, accounting for 23.2%. Additionally, ENS currently has no other sources of income.

From a technical implementation perspective, ENS emphasizes the decentralization of domain registration, free from any third-party interference. The main functions of ENS are implemented through three smart contracts that realize business logic, with open-source code and transparent processes. The Registrar contract is mainly responsible for recording key information such as domain ownership, duration, and resolvers, controlled by users in the form of NFTs to ensure ownership. The Resolver contract primarily implements the resolution of domain names to addresses, while the Controller contract is responsible for business logic such as domain sales and updates, interacting with users and contracts to complete payment and domain acquisition through oracle pricing. The differentiation at the contract level is to ensure decentralization, where the registrar remains as simple as possible without changes, while contracts facing front-end business can be upgraded according to market conditions without affecting the security of ownership.

From a governance structure perspective, the ENS project is still controlled by the core team, with governance reflected in project revenues going to the community treasury and funding usage decided by DAO voting. The project took a snapshot of contract interactions before October 31, 2021, and based on this, conducted an airdrop, with 25% airdropped to users who held domain names at that time, 25% airdropped to hundreds of contributors (of which 18.96% went to 11 core members), and the remaining 50% belonging to the community treasury. ENS has no external financing apart from sponsorship from the ecological foundation, so there is no proportion of investment institutions in the airdrop. The treasury's revenue mainly consists of two parts: first, the airdrop portion, which will be gradually unlocked and sold for project development over four years; second, the project's revenue belongs to the treasury and is collectively proposed and voted on by the community to support ENS ecological project activities, such as sponsoring ecological projects, hosting offline events, hackathons, etc.

Interpreting ENS's business model: domain business builds a safety margin, traffic entry brings ecological imagination.

From a business revenue perspective, the user stickiness of domain income builds the project's safety margin. ENS charges a fixed annual fee for each registered domain, varying by character length, so the project's average annual revenue is calculated as [number of domain registrations × average annual registration fee]. The average annual revenue from domain registrations over the past year was $27.3, and with the current registration volume of about 2.35 million, the estimated annual revenue is about $64.15 million. The domain business has strong stickiness, and as ENS domain names map identities, this stickiness will strengthen with the development of digital identity.

The domain business serves as a traffic entry point, bringing imagination for the development of the ENS ecosystem. DNS domain registrars often rely on domain names as a traffic entry point to develop other businesses, such as Cloudflare providing security services for website building while selling domain names at wholesale prices. GoDaddy provides a complete set of tools for enterprise information operations while offering full-process domain services, allowing users to quickly choose website deployment, email setup, and other convenient value-added services after purchasing a domain. As a well-known DNS domain service provider, GoDaddy's domain service revenue currently accounts for only 47% of its total revenue. ENS is similar; in addition to the core function of domain sales, it is also developing mobile applications. A mobile domain management and query application may not be far from a Web3 social address book.

Interpreting ENS from data: short-term bubble digestion, long-term potential is huge.

From the transaction structure perspective, the speculation bubble is being digested, and the actual number of users is beginning to expand. Overall, there is still speculation behavior in ENS. The total number of domain names is about 2.35 million, while the actual number of users is about 550,000, with an average domain holding of about 4. According to Dune@andrewshvv, comparing the transaction volume of domain merchants with ordinary users shows that the transaction volume of ordinary users is steadily rising, indicating that more registered users are ordinary users or new users holding fewer domain names. As the application scenarios for domain names expand further, the proportion of domain name speculation will further decrease.

From the overall industry data perspective, ENS has significant growth potential and benefits steadily from Ethereum's expansion and outreach. In the long run, the number of ENS users will account for a certain proportion of Ethereum users, influenced by the importance of the digital identity ecosystem. Due to the anonymity and decentralized generation of Ethereum addresses, there is no clear user count, often using the number of active addresses. In August, the number of monthly active addresses on Ethereum was 6.7 million, with approximately 50 million active addresses throughout 2021. Currently, ENS has 550,000 users and 2.35 million registered domain names, compared to the tens of millions of Ethereum users, indicating nearly tenfold growth potential. As Ethereum expands and the influence of Web3 gradually increases, ENS will benefit steadily from the growth of Ethereum users.

Compared to traditional domain registrars, ENS has promising prospects, and three important growth points can be focused on in the future: (1) Ecosystem expansion based on domain business, whether it can leverage the entry advantage of domain business to strengthen the ecosystem; (2) The holding ratio of Ethereum users, whether it can become a necessity for Ethereum users; (3) The influx of new users brought by Ethereum's outreach and Layer 2 expansion. At the same time, we believe that the community treasury in the ENS DAO token mechanism is more akin to a future regular issuance plan and should not be fully counted in the total market value.

Future Outlook for Web3 Domain Names

Intense competition, domain registration is prone to monopoly. The competition in the Web3 domain service track is fierce. According to PANews statistics, there are currently 16 domain names on public chains, including both single-chain solutions and multi-chain domain services. Among them, UnstoppableDomains has reached 1.9 million registrations. In the DNS era, domain names are managed authoritatively by ICANN, and while there are domain names outside its jurisdiction, other applications in the internet ecosystem often cannot recognize non-ICANN registered domain names. Domain registration requires globally consistent records and default compatibility within the ecosystem, which has monopolistic market characteristics, so it is advisable to pay attention to leading projects.

NFTization, secondary trading is worth looking forward to. Web3 domain names, as NFTs, solve many issues related to the circulation of domain names, enhancing liquidity. Additionally, due to the open nature of the ecosystem, any platform and user can build their own secondary trading applications, providing personalized services and further promoting liquidity. Currently, ENS has also seen similar plays like 3digitDAO (a DAO for 3-character domain names), where the combination of NFTs and domain names brings exploratory space for gameplay.

Risk Warning

Blockchain policy and regulatory risk: Currently, blockchain is in its early development stage, and there is a certain degree of uncertainty regarding the regulation of blockchain technology, project financing, and tokens in various countries around the world, leading to uncertainty in the development of industry companies and projects.

The development of decentralized digital identity is not meeting expectations: Decentralized digital identity (DID) is currently in the exploratory phase of the industry. Although market demand is prominent, there is uncertainty about whether DID solutions can be widely adopted by users.

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

This article is excerpted from the report "Metaverse (XI): From DNS to ENS, the Web3 Era of Domain Names," published by Guosheng Securities Research Institute on September 14, 2022. For specific content, please refer to the relevant report.