Web3 Domain Race: The Ice and Fire Facing the Leader ENS

Author: Steven@THUBA Research Core, DAOrayaki

Web3 is not just about blockchain and EVM compatibility; it also includes a DID system aimed at the entire Web3 ecosystem. This article will analyze the DID track from the following aspects.

• Popular Science: Characteristics and application scenarios of Web3 domain names
• Current Situation: Market size, distribution, industry KSF, and pain points of Web3 domain names
• Case Study: How the open-source decentralized identity protocol .bit challenges ENS
• Commentary: From the Web3 domain name track to specific case innovations

The author may hold assets issued by relevant projects mentioned in the text, which presents a conflict of interest and does not constitute any investment advice.

Analysis of the Web3 Domain Name Track

Here, we quote AnT Capital's Lin Chuan's overview of the DID track. The current Web3 projects can be divided into four layers, from upstream to downstream:

• Credential Layer - Credential issuance, represented by projects like GALXE, Rabbithole, POAP, BrightID, etc.
• Identity Layer - Aggregation protocols, represented by projects like KNN3, RSS3, Cyberconnect, etc.
• Identity Management Layer - Mainly consists of wallets and domain names, represented by projects like UNIPASS, ENS, LOOT, .bit, etc.
• Application Scenario Layer - Projects can be roughly divided into two categories:
• Reputation and Relationship

Reputation: Reputation / Resume / Social Display. This type of application scenario focuses on evaluating and classifying users by simplifying digital identities into some explicit trusted labels, achieving a quick screening effect. For example: credit lending, job seeking, socializing with strangers, etc.

Relationship: Narrative of DID's relationship application scenarios. This type of application scenario focuses on more complex and comprehensive application analysis by viewing digital identities as the accumulation of user data in Web3. For example: recommendation systems, socializing with acquaintances, Web3 games, DAO voting governance, etc.

What is a Web3 Domain Name?

Web3 domain names generally refer to those with suffixes like .eth, .bnb, nft, .wallet, etc., which are abbreviations of public chains or have strong Web3 characteristics, and their application scenarios are mainly in the blockchain/Web3 field. Ethereum's ENS is the most well-known and representative project in this track.

The concept of domain names originated in the early internet era. In the beginning, everyone accessed web pages directly through IP addresses. For example, if you enter "202.108.22.5" in your browser's address bar, you can open Baidu's homepage because this string of numbers is Baidu's IP address. However, this string of numbers is not readable and hard to remember. Therefore, early internet designers built the Domain Name System (DNS), encapsulating digital IP addresses with more readable domain names like www.baidu.com for everyday use. Now, every internet user knows the concept of a "web address," even if most of them do not understand the underlying principles of IP addresses, DNS, etc., but this does not hinder their experience on the internet.

The most intuitive value of Web3 domain names is similar; it serves as the user's "Web3 nickname," encapsulating on-chain addresses. For example, vitalik.eth encapsulates this Ethereum address: 0xd8da6bf26964af9d7eed9e03e53415d37aa96045.

Every Web3 user will hold at least one on-chain address, but probably no one thinks about remembering their address, let alone remembering others'. Domain names like vitalik.eth, 2089.bit, jack.bnb are clearly more readable and memorable than a long string of address characters, better meeting people's daily needs. For instance, if you need your friend to transfer money to you, you might have to find your on-chain address in your wallet or notes and send it to your friend; but if you hold a domain name like vincent.eth, you can simply tell your friend to transfer to that domain.

From a technical perspective, the technical essence of domain names is not complex; it is simply a "mapping" of data relationships. Therefore, its specific implementation can take multiple paths: In Web2, all domain name registration and management are handled by ICANN, located in California, USA, which is highly centralized and regulated by the US government; but in Web3, the most mainstream domain implementation method is on-chain smart contracts represented by ENS, which mints each domain as an Ethereum NFT, allowing for permissionless and free registration and trading, with users setting the corresponding resolution addresses themselves.

Application Scenarios of Web3 Domain Names

Domain names mainly have four major application scenarios: domain name + dapp applications, domain name + wallet, domain name + web2, and domain name application itself.

• Domain Name + dapp Applications: The most direct application is to use the domain name directly as the account name for various Web3-related applications. In Web3, due to wallet address login and the on-chain resolution of domain names, DApps can easily support users using a domain name as their account name. Moreover, due to the uniqueness of domain names, as multi-chain support for domain names matures, you can ensure that the same domain name used on Opensea (ETH) and Magic Eden (Solana) belongs to the same person. Even Web2 applications like Twitter and Jike can authenticate users who use their owned NFT domain names as their usernames through plugins and other means.

• Domain Name + Wallet: Supports searching for domain names during transfers, eliminating the need for users to remember transfer addresses. For example, the leading wallet product Metamask has already implemented ENS domain name search support. Further, after integrating domain names and their various resolution relationships, wallets can also display them. For instance, showing the Twitter, Reddit, and other Web2 social platform relationships corresponding to a domain name account, as well as the credentials held by users in various DApps. Currently, some wallet projects focusing on DID have relevant explorations.

• Domain Name + Web2: Direct resolution of domain names in browsers requires applying to the Web2 domain management entity, ICANN in the USA. Since the connectivity of Web2 websites is not the core value of Web3 domain names, and due to the aforementioned reasons, there is currently no Web3 domain project that can achieve "direct Web3 domain names as website addresses." Through the unremitting exploration of community members in the Web3 community, a relatively mature "curve-saving" solution has formed: using Web3 domain names as second-level domains under top-level domains.

Although "vitalik.eth" cannot be directly input into a browser for resolution, domains like "vitalik.eth.xyz" and "vitalik.eth.link" can. Readers might also try it out; for example, entering "vitalik.eth.xyz" in the browser will show Vitalik's default generated ENS Profile; entering "vitalik.eth.link" will show Vitalik's personal homepage.

• Domain Name Application Itself: Identity management tools & social display homepage, i.e., the DID attributes that domain names possess. As more applications, wallets, and Web2 platforms support domain names, the domain name application itself will also carry more identity management functions. Specific examples include: setting resolution targets for various chains and Web2 platforms, setting the address, format, and display information of personal homepages, and setting some privacy content / content that requires specific permissions to access, etc.

Market Size of the Web3 Domain Name Track

If we do not consider other revenues beyond domain registration fees, the total addressable market (TAM) of the entire Web3 domain name track can be broken down into: number of Web3 users x number of Web3 domain names owned by a single user x annual subscription fee per domain name.

According to data from ConsenSys, there are 20 million active Web3 users worldwide each month.

Since a single user can register different numbers of domain names across different projects, according to ENS data, the number of users holding ENS is 594k, with a total registration of 2.76 million, meaning the average user holds 4.6 domain names. A conservative estimate suggests that each person registers an average of 3 Web3 domain names.

Calculating at $5 per domain per year, registering a domain on ENS requires a $5 annual subscription fee, while the registration fee for .bit = annual fee * registration period length + storage fee, with the cheapest annual fee being $4.99/year.

Potential market size = 20 million x 3 x $5 = $300 million, meaning an annual revenue of $300 million.

The registration fee is just one part of the most direct income for domain projects. As the DID track develops, domain projects as identity management service providers can explore more diverse business models to increase revenue sources.

According to ENS chief developer Nick Johnson, in May 2022, ENS achieved a record monthly revenue of over $8 million.

Referring to the entire domain industry: In 2020, the global domain registration market size was 374 million, a year-on-year increase of 0.7%, while China's domain registration market size reached 43.08 million. According to Straits Research, it is expected that by 2027, the global domain registrar market size will reach $10.25 billion, with a compound annual growth rate of 4.70%.

Major Projects

Current domain projects can be classified into the following three categories: single-chain domain names, multi-chain domain names, and DNS alternative domain names. Single-chain domain names can be further refined. As shown in the figure below:

1) Single-Chain Domain Names

>> Public Chain Domain Names: Represented by ENS

These projects are highly recognizable: they all have public chain abbreviations as suffixes, such as .eth, .sol, .avax, and all have official backing or clear support from public chains. Their implementation logic and application scenarios are also highly similar, merely differing across different public chains. Therefore, to study these projects, one only needs to focus on ENS.

ENS is the leading project in the Web3 domain name field, founded by former Google software engineer Nick Johnson in 2016. Initially, ENS was a side project authorized by the ETH Foundation, which later established the ENS team with the support of the ETH Foundation. ENS has not received any external funding, only donations from institutions like the Ethereum Foundation.

ENS launched its test version in May 2017 and its official version in May 2019. ENS's trading volume consistently ranks in the top ten on Opensea, with two peaks in trading activity in November 2021 and April-May 2022. As of early November 2022, ENS had registered 2.62 million domain names, with 573,000 registered users and 508 ecological cooperation projects, all significantly ahead of many similar projects. ENS airdropped tokens in November 2021, and by early November 2022, its fully diluted market cap was approximately $1.5 billion.

ENS currently has no plans to expand directly to other public chains; recent actions have mainly focused on the connectivity of Web2 web pages, such as the aforementioned secondary domain web pages and their corresponding applications. Additionally, ENS is also working with Spruce ID to promote a new login method called Sign-in with Ethereum (EIP -4361), hoping to achieve connectivity of identity data, which is very worth watching and looking forward to.

>> Web3 Domain Registrars: Represented by Unstoppable Domains

These projects often sell multiple suffixes of Web3 domain names, and these domain suffixes are often highly related to Web3. A representative of these projects is Unstoppable Domains.

Unstoppable Domains completed a $65 million financing round in July this year, with a valuation of $1 billion, close to ENS's level. It supports the registration of 9 domain names: .crypto, .nft, .x, .wallet, .bitcoin, .dao, .888, .zil, .blockchain. Notably, unlike most domain projects that require annual renewal, Unstoppable Domains uses a permanent registration mechanism, making the fees for some rare domain names more expensive.

The registration process for Unstoppable Domains is not fully on-chain like ENS; instead, it follows a centralized registration management + on-chain NFT minting model: users can register using Google login + credit card payment, and then mint the NFT on Polygon (except for .zil domains, which are minted on Zilliqa).

In terms of project development, Unstoppable Domains will also focus on the concept of "Web3 Names," but its actual product design and promotion consider the experience of Web2 users and the interoperability of its domain names with Web2 websites.

Unstoppable Domains may not be particularly well-known in the Chinese community, but it has a significant reputation and marketing strength overseas. Currently, the number of registered domain names on Unstoppable Domains has exceeded 2.7 million, with over 500 applications integrating Unstoppable Domains.

>> Social Domain Applications: Represented by Linkkey

These projects may not have particularly innovative technology in domain names but focus more on innovative gameplay—combining domain names with social applications. Linkkey's SNS is one such representative, aiming to use domain names as a carrier for "value socializing" in the Web3 field. According to the theory that "a person can only maintain deep social links with up to 150 people at the same time," each SNS user can issue NFTs symbolizing their social value, with market prices determining the user's social value. Linkkey's token model design is also somewhat innovative, and its domain registration function and some product features have already been launched, with the complete product expected to be available by the end of this year or early next year. Interested friends can visit their official website for some experience and in-depth understanding.

2) Multi-Chain Domain Names

NNS, .bit, and Space ID are the three main projects in this category. They all emphasize the nature of "Web3 identity cards" and "Web3 identity management" in their promotion and development, and they have outlined clear multi-chain support plans. However, the specific implementation of "multi-chain support" varies among the three domain solutions. Below is a brief introduction to NNS and SpaceID, with .bit being introduced in the following section.

>> NNS

NNS is a domain system with the .nft suffix launched by Metascan.pro (the parent company of Twitterscan), currently mainly implementing registration, resolution, and other core functions on the Ethereum main chain.

The project team of Metascan plans to launch NNS contracts on other public chains (such as BSC) in the coming weeks, allowing users to register and manage domain names at lower GAS fees. The NNS domain system on different public chains is unified, and this "unification" may involve deploying some information cross-chain nodes and may also involve some centralized management forms.

Theoretically, cross-chain domain names do not seem complex; as long as cross-chain nodes can achieve unified resolution information for domain names across all chains. However, in practice, when multiple public chains are involved, maintaining synchronization and real-time consistency of domain registration information poses many challenges under the current Web3 infrastructure. This is also why most domain projects currently only support one public chain. How NNS specifically implements this cross-chain functionality and its stability and decentralization level is worth attention.

>> Space ID

Space ID launched the .bnb domain on BSC. Currently, regarding the domain smart contract itself, its nature is highly similar to ENS, only supporting connectivity and resolution of projects on BSC, with nothing particularly special. However, Space ID plans to launch a "namespace" to integrate domain projects across various public chains and even allow Web2 platform companies to issue their own domain spaces, rather than hoping their domain suffixes become universal names in the Web3 field like .bit.

This namespace can be roughly understood as follows: if a person holds Solo.bnb on BSC, in Space ID's namespace, they will hold bnb:solo; if they hold Solo.eth, they will hold eth:solo in the namespace; even account names for companies like Apple and Google can be transformed into similar forms like apple:solo, google:solo, etc.

This vision is worth attention and anticipation, but the current parts that Space ID has launched still have a certain gap from this vision and may require longer iterations.

In summary, although most Web3 domain names position identity management as a core narrative, once it involves the interoperability of multi-chain smart contract domain names, it faces complex technical details regarding cross-chain and multi-chain. Currently, .bit's multi-chain solution is the fastest in this area.

3) DNS Domain Alternatives: Handshake, Namecoin

Due to the centralized management of Web2 ICANN domain names, many decentralized believers have expressed dissatisfaction. Therefore, some people are exploring the realization of decentralized website domain resolution. The main vision of these two projects is to serve as a supplement and alternative to the Web2 DNS system. Due to their philosophies, development directions, and significant differences from most Web3 domain names, and because they have not attracted much market attention recently, this article will not focus on them. Interested readers can conduct in-depth research on their own.

Industry KSF (Key Success Factors)

The author believes that the key success factors for Web3 domain projects include: multi-chain support, a rich project ecosystem, and a scientific domain registration mechanism.

Multi-Chain Support

One of the core narratives of domain projects is their ability to serve as "universal names in Web3," maintaining uniqueness across public chains and even the entire Web3 ecosystem. If this uniqueness is compromised, the entire value of the domain will be affected. Imagine if two .eth projects opened registration simultaneously, each with its own cooperative applications; which project's .eth domain would you register? If a friend gives you a domain name as a transfer target, would you need to ask if the domain project your wallet supports is the same as the one your friend registered? Clearly, this would create significant confusion in the on-chain identity system.

Intuitively, the issuance of domain name suffixes generally follows a "first come, first served" principle, where the domain project that conducts relevant business first can obtain control over the corresponding domain project, while later projects resemble a copycat and should not be accepted by the mainstream community. For example, if I were to copy ENS's contract and issue an identical .eth domain on Ethereum without using phishing websites or other fraudulent means, it is hard to imagine what kind of users would pay to register my issued .eth domain after knowing the details of both projects.

However, things are often not that simple, as the two projects may not be on the same public chain, and the judgment of "first/last" in business may not be clear. The focus of the projects' business may also differ, attracting different users at launch. Therefore, in the early stages, the consequences of such conflicts may not be apparent, allowing both projects to develop simultaneously. So how should application project parties resolve related cooperation support issues?

A recent controversy worth noting in the domain field is that the .nft domain issued by NNS was delisted by Opensea (other trading platforms did not delist it) because Opensea received a complaint from Unstoppable Domains, which publicly sold .nft domain names in the market before NNS and has registered the ".nft" trademark in Hong Kong. However, in fact, the NFTs of .nft domains issued by NNS and Unstoppable Domains are not on the same public chain, and their business focuses are also quite different; it is not a case of imitation and being imitated. From the perspective of trademark infringement, NNS registered the ".nft" trademark in countries like Japan and South Korea earlier, so the rationale for Opensea delisting NNS is actually debatable.

Therefore, the current industry has two ways to address this issue:

1) A single project should cover as many public chains as possible to avoid more incidents like .nft. 2) Establish a Web3 Domain Alliance to coordinate the interests of various domain project parties.

In fact, on November 2, 2022, Unstoppable Domains announced the establishment of the Web3 Domain Alliance (W3DA) at the Web Summit in Lisbon, with current members including Bonfida, Tezos Domains, Polkadot Name System, Hedera, Syscoin, and Klaytn Name Service.

Rich Project Ecosystem

The author believes that the Matthew effect in the Web3 domain track is very strong; a single user's wallet often only uses one domain as their Web3 business card (except for speculative purposes). To encourage users to choose their domain, project parties need to collaborate and promote as much as possible with upstream and downstream partners to enrich their project ecosystem. Upstream involves aggregation protocols, wallets, etc., while downstream involves various DApps and even Web2 applications. If a domain can be used across different projects, it can better help users achieve identity management.

The long-term development of domain projects, in the author's view, mainly depends on the development of the Web3 application ecosystem, especially the development of Web3 social projects. Because relying solely on the promotion of domain projects themselves in applications and wallet account names is unlikely to bring fundamental large-scale increments to the entire field; only the vigorous development of application projects can highlight the importance of the account name system and identity management system associated with domain names, showcasing the value of the domain itself. However, before that, domain projects must be well-prepared to avoid discovering that their identity management, cross-chain solutions, and Web2 website connectivity are still not mature enough when the real application wave arrives. Additionally, domain projects venturing into social applications or creating login systems similar to wallets is also a potentially viable development path.

Scientific Domain Registration Mechanism

Statistics show that due to the scarcity, memorability, and strong potential brand value of short numeric and short English domain names, current domain trading is concentrated on short numeric and short English domain names, with users exhibiting strong speculative tendencies; this can affect the entry of KOLs and large brands because once their domain names are registered by other speculators, they will need to pay a high price to buy them back, while domain projects need KOLs and large brands' endorsements and promotions to attract more ordinary users. Whenever a new domain project appears, there will always be some speculative users who rush to register a large number of three-digit and four-digit domain names, and project parties are aware of this. Some project parties will explicitly raise the registration fee for short domain names, while others will reserve short domain names as special items for relevant brands.

Users should also conduct more detailed investigations when choosing domain projects, paying more attention to the actual progress of their application scenarios, including: the number and quality of application projects supporting the domain, the progress and feasibility of the vision depicted by the project party (such as social display, multi-chain interoperability, Web2 website support, etc.).

Pain Points in the Industry

The most significant pain point is the aforementioned suffix domain conflict. After all, creating a smart contract that imitates ENS and issuing an NFT for a certain domain suffix to the public is almost a barrier-free task. Secondly, domain names are not an immediate necessity for current Web3 users, with significant speculative attributes; the number of users who truly treat domain names as Web3 business cards is limited. Even if users do not purchase any Web3 domain names, it does not affect their normal Web3 application experience; even if they lose their purchased Web3 domain names, unless they have extensively used this domain for their social accounts (like the author using stevensu.eth), their perception will also be limited.

Specific Analysis of the .bit Project

The .bit project is a DApp running on the Nervos public chain, using CKB Token for settlement; it is somewhat constrained by the development of the Nervos ecosystem and users' acceptance of CKB Token. The main data shows that the number of registered accounts is 246,000 (about 9% of ENS), and the number of users is 83,000 (about 14% of ENS).

Project Highlights

The biggest difference of .bit from other projects is its cross-chain capability. It can be said that .bit supports any public chain address, thanks to the highly scalable and high-level abstract Nervos CKB network, allowing almost any public chain to be compatible with .bit without any modifications. Currently, .bit has cross-chain support for Ethereum, Tron, BNB Chain, and Polygon, meaning you can register your .bit on any of these four public chains; you just need to keep your private key on that public chain safe.

In the future, .bit plans to add support for various common public chains such as Bitcoin, Dogecoin, Polkadot, Dfinity, Solana, Filecoin, Cardano, NEM, Monero, Flow, NEAR, Litecoin, Nervos, Terra, Celo, Dash, and Cosmos.

.bit supports not only public chains that can run smart contracts but also those that do not support smart contracts, like Bitcoin and Dogecoin, which is something that is difficult or even impossible for similar products to achieve.

.bit accounts are universal; you can resolve any public chain information on that account.

.bit supports the resolution of identity addresses on Web2 as well as blockchain addresses, so after information resolution, you no longer need to remember your lengthy address; you only need to provide your .bit account, and the other party can view all your related information.

.bit is not only a DID account but can also serve as a cross-chain asset aggregator. By owning a .bit account, you also automatically own .bit.host and .bit.cc; for example, if you own 0xfather.bit, you also own the two domain addresses 0xfather.bit.host and 0xfather.bit.cc, which you can use to view your public chain assets. Additionally, .bit has integrated NFT, POAP, .bit accounts, public chain addresses, and other content, so owning a .bit account is equivalent to having a dedicated identity card that spans across chains and resources.

The second highlight of .bit is its full support for decentralized services. Currently, .bit can be registered not only on the official did.id but also through service providers like DeName (China), mybit.jp (Japan), COCH (Indonesia), das.la, etc., because .bit's smart contracts allow third-party interactions. Service providers can create related registration or data services by calling .bit's smart contract data resources, which ENS and similar products currently cannot achieve in terms of decentralized support. The third highlight of .bit is its sub-account feature. The sub-account feature is based on the .bit account, allowing .bit account holders to create sub-accounts at a very low cost. The sub-accounts function identically to the parent account and will exist as independent accounts once created.

For example, if Jay Chou holds the jay.bit account, he can create sub-accounts like jay#fans001.bit, jay#fans002.bit, etc., to distribute to fans. The sub-accounts have no functional differences from the parent account, and the pricing rights of the sub-accounts are determined by the parent account; for instance, jay.bit can decide how much to sell jay#fans001.bit for, effectively managing the speculation and abuse of sub-accounts. At the same time, sub-accounts can renew the main account to ensure its security. This gameplay is somewhat similar to the currently popular SBT.

The sub-account feature can be said to be an industry-first feature, and it is foreseeable that the launch of the sub-account feature will assist in the management of DAO organizations, NFT communities, and the creation of IP brands.

Currently, it is still in beta, and applications for experience are welcome.

Future Development

The official website lists two upcoming features:

1) Aggregating user activity information on-chain, which seems to aim at entering the track of on-chain information aggregation. 2) End-to-end encrypted communication between friends to enhance the product's social attributes.

Business Model

Revenue sources: Annual fees for domain registration and potential interest from storage deposits.

The price list for annual domain registration fees is as follows:

.bit stores account information on the Nervos CKB chain, requiring a certain amount of on-chain storage space, thus necessitating a storage deposit. The fixed storage fee for each account is 206 CKB. If a user's account expires without renewal, the deposit will be returned to the owner's address upon expiration. This deposit may generate some interest income for the project.

Token Economics

The project has not yet issued a token.

Financing History & Investors

On June 21, 2021, the cross-chain decentralized domain/account system DAS (the predecessor of .bit) completed its seed round financing, led by HashKey and SNZ, with other investors including SevenX, Nervos Foundation, etc. On August 15, 2022, it announced the completion of a $13 million Series A financing round, led by CMB International, HashKey Capital, QingSong Fund, GSR Ventures, GGV Capital, and SNZ.

Summary and Evaluation

Regarding the DID track, the mainstream investment perspective in the market is to start from the user, with applications preceding protocols. The specific priority is: identity management > application scenarios > credential issuance > (non-user-facing) identity aggregation protocols.

For identity management tool projects: wallet and domain projects are prioritized. From the ultimate form of DID, both occupy very core positions.

For application scenario projects: as mentioned earlier, more opportunities arise from native Web3 application needs rather than the replication of Web2 products. Web3 recruitment based on credentials, interest-based socializing based on NFTs, etc., all belong to these irreplaceable Web3 scenarios.

For credential issuance projects: credential issuance tools/platforms may yield 1-2 leading universal projects and several corresponding tools for specific application scenarios; specific credential issuance projects that can provide high-value credentials are also worth attention.

Currently, .bit has not been supported for resolution by mainstream wallets like Metamask and Coinbase, the number of dapps supporting domain display is also quite limited, and registration can be done without CKB payment, but binding must pay a CKB deposit, so I have temporarily not bound my .bit domain.

As one of the only multi-chain domain projects that can compete with ENS, .bit currently has about 1/10 of ENS in terms of domain registration numbers and user numbers. However, to differentiate itself from ENS, .bit is actively exploring directions such as sub-accounts, on-chain information aggregation, and social features.

As a startup that has been established for less than two years and has just completed its Series A financing, .bit is worth continuous attention from an investment perspective.