Title: "ENS Valuation: More Than Just a Domain Name"

Author: Mason Nystrom, Messari Analyst

At its core, blockchain has created a brilliant way to record assets, and one of the largest digital native assets is domain names. Blockchain-based domain names are digital assets that map IP addresses to more human-readable names (for example, mapping 13.57.64.34 to Messari.io). As one of the first native digital assets, it is no surprise that many projects have attempted to bridge internet domain names to the blockchain since the inception of Bitcoin.

01. ENS: Ethereum Name Service

The Ethereum Name Service (ENS) is a domain registration protocol designed to map a human-readable domain name (like alice.eth) to an Ethereum address. ENS provides several key use cases:

• Web3 identity/username
• Native payments
• Enhanced domain ownership
• Decentralized networks

Let’s elaborate on these use cases.

1) Web3 Identity

While ENS initially created .eth domain names solely on the Ethereum blockchain, by August 2021, ENS included both .eth domain names and DNS domain names (like .com, .cash, .money). In fact, companies like Google can integrate their DNS domain names (i.e., Google.com) into ENS and use their domain as a wallet, Web3 username, and a decentralized website.

Tweet

As of the time of writing, there are 447,623 ENS domain names (including .eth and DNS domain names) created, with 72% of them being .eth domain names.

Moreover, just as internet users can log into various websites using accounts from Google, Twitter, or Facebook, ENS could potentially serve as a "single sign-on" in Web3. Since ENS domain names are self-custodied, it eliminates the traditional reliance on centralized intermediaries (like Google) to log into various platforms.

2) Native Payments

All ENS .eth domain names and DNS integrated domain names can serve as native cryptocurrency wallet addresses, capable of receiving multiple cryptocurrencies, including BTC, ETH, DOGE, and other integrated assets. By connecting ENS to DNS, transactions can be sent to specific websites for payments without going through payment intermediaries.

3) Enhanced Domain Ownership

ENS aims to integrate into our existing Domain Name System (DNS), which underpins the current way the world browses the internet. However, unlike traditional .com domain registrars (like Verisign or GoDaddy), the ENS protocol cannot revoke a user's .eth address because users control their own domain names (unless users stop paying for that ENS domain name).

4) Decentralized Networks

ENS addresses can be used with IPFS (InterPlanetary File System), Sia Skynet, and Arweave. For example, by connecting ENS or integrated DNS to IPFS, websites can be stored on IPFS.

However, the ultimate benefit of ENS comes not just from a single use case, but from the aggregation of potential use cases. As a protocol with native payments and potential anti-censorship features, ENS is still in its early stages. With the launch of the ENS DAO and its governance token, the future of ENS is becoming increasingly interesting. Let’s take a look at ENS DAO, the protocol's airdrop, and the current state of ENS.

02. ENS DAO

As part of decentralizing the ENS protocol, ENS has launched its own governance token and will operate through a DAO (Decentralized Autonomous Organization).

1) ENS Airdrop

The ENS airdrop may be one of the fairest airdrops in recent times. Typically, DeFi protocols airdrop rewards to users who inject funds into DeFi protocols, but the ENS airdrop does not favor users who spend the most; instead, the community token distribution of ENS is less biased towards the wealthy compared to most other retroactive airdrops. In DeFi protocols, liquidity is arguably the most important added value, so retroactive airdrops often reward users proportionally based on the amount of funds they deployed into the protocol. However, while the ENS protocol generates revenue from user fees, the protocol determines capital and should be the ultimate factor for community contributions.

During the airdrop, ENS also added a multiplier for active users, meaning that if a user's account additionally set up a reverse record, they would receive double the ENS tokens.

The distribution ratio of ENS tokens is as follows:

• 25% allocated to .eth holders (over 137,000 accounts)
• 25% allocated to ENS contributors (over 100 organizations and individuals, as well as over 450 active Discord users);
• 50% allocated to the ENS DAO community treasury

A total of 137,689 wallet addresses qualified for the ENS airdrop, and these addresses could claim ENS tokens before May 4, 2022. The median for this airdrop was 180 ENS tokens, which is approximately $10,000 at today's prices. Although over 60% of the 25 million ENS tokens allocated for the airdrop have been claimed (as shown in the image below), 40% of the tokens remain unclaimed. Given the large volume of the airdrop, the sale of tokens may bring potential negative price pressure. It is worth noting that while the ENS airdrop system is one of the best systems, it still allocated too many tokens to past participants who have been inactive in the ENS ecosystem.

2) ENS Governance

According to its announcement, ENS token holders will need to formally apply to the ENS root key holder to gain the ability to govern the protocol parameters (such as domain pricing, price oracles, etc.) and control the current community treasury funds. Any governance proposal will require at least 100,000 tokens in support to enter the voting phase, and proposals can only pass if the number of tokens participating in the vote reaches at least 1% of the total token supply and a majority of votes are in favor. ENS holders are encouraged to delegate their voting rights to a community member who represents their views.

Additionally, ENS has established the ENS Foundation in the Cayman Islands to legally represent the DAO organization, facilitating any necessary real-world actions and the election or removal of directors.

Perhaps most importantly, ENS token holders were required to vote directly on the ENS constitution when claiming their tokens. Essentially, this ENS constitution outlines several key principles, including that ENS governance must respect the property rights of ENS domain name users, avoid rent-seeking behavior, refrain from supporting other competing protocols, and maximize integration with the traditional DNS domain name system without sacrificing ENS decentralization.

I believe most people do not fully understand the importance of this last aspect, so let me briefly explain its significance.

3) Integration of DNS & ENS

Current DNS services have a centralized domain registration authority known as ICANN (Internet Corporation for Assigned Names and Numbers). This approach is practical because it ensures that there are no conflicting domain names (for example, there won't be two types of Messari.io domain names), allowing domain names to "resolve" to an IP address/website. Integrating ENS into the existing ICANN domain registry means that there will be no conflicts between the two. A person who owns an ENS address can resolve/point to a similar ICANN-registered website. This is different from other non-ICANN-registered domain solutions, as it could potentially conflict with the existing DNS structure.

A stark contrast example to ENS is HNS, which attempts to replace ICANN by creating a new root domain registry. They have reserved top-level domains (like Google.com) for top IP addresses to prevent conflicts and allow existing companies to migrate. However, if HNS domain names conflict with ICANN, it could have harmful effects and hinder integration. Therefore, HNS's essential goal is to create a new DNS system (which has its advantages but is beyond the scope of this article).

In contrast, ENS aims to add Ethereum's functionalities (programmability, native payments, etc.) to domain names, allowing them to serve as wallets/domains while easily integrating with the existing DNS architecture. The decision to integrate ENS with DNS is a strategic decision by the protocol team, aiming to establish a naming system and registrar that can be adopted worldwide.

03. Sustainability of ENS

ENS domain names are created through the ENS Registrar contract, and users must pay fees for registration (creating a domain name) and renewal (retaining a domain name). ENS fees serve as an anti-squatting mechanism to ensure that no one holds a domain name indefinitely.

Thus, the price of ENS domain names varies based on the length of the domain name:

• Domain names with 5+ characters: $5 per year;
• Domain names with 4 characters: $160 per year;
• Domain names with 3 characters: $640 per year.

For importing DNS domain names into the ENS system, the ENS protocol does not charge fees since DNS domain names already require payment to DNS providers (like GoDaddy, etc.).

While the ENS protocol generates revenue through both domain registration and domain renewal, as of now, the vast majority of ENS protocol revenue comes from domain registrations, as shown in the image below:

The above image shows the growth of ENS protocol revenue. It is evident that the protocol's revenue primarily comes from domain registrations (light blue section), rather than domain renewals (dark blue section).

The ENS protocol has generated nearly $20 million in total revenue from domain registrations and renewals. In recent months, ENS's revenue has surged, with three out of the last four months exceeding $2 million (as shown in the image above). Nearly 90% of the cumulative protocol revenue was generated in 2021, which is a positive sign for the protocol's revenue growth. But the key question is, is this sustainable? Time will tell, although I expect the revenue of the ENS protocol to decline after reaching a historical peak by the end of November.

Interestingly, the ENS protocol saw the highest registration and renewal revenue in early November, likely due to individuals trying to participate in the airdrop after the protocol announced the upcoming airdrop on November 1. However, the snapshot for the airdrop was taken on October 31, 2021 (the day before the airdrop announcement), meaning that all domain registration or renewal transactions occurring in November would be ignored in the token distribution eligibility assessment.

The above image shows that the ENS protocol has generated nearly $19 million in cumulative revenue.

However, the chart above does not tell the whole story, as ENS receives fee revenue in ETH (not USD), and the protocol has likely held a significant amount of ETH over time.

Since its launch, the ENS protocol has generated nearly 13,000 ETH in revenue, of which about $2.5 million is from domain renewal revenue, and 10,000 ETH comes from domain registration fee revenue. As shown in the image below:

The above image shows that the ENS protocol has accumulated 13,000 ETH in revenue since its launch.

As part of the decentralization of the protocol, the funds in these ENS treasuries will be allocated to the DAO organization. As of the time of writing, the ENS Registrar contract holds over 4,000 ETH (approximately $20 million).

At the time of writing, the ENS tokens used for governing the ENS protocol have a fully diluted market capitalization of $5.5 billion (calculated at a price of $55 at the time of writing). If we calculate based on the $16 million in protocol revenue earned so far this year, this means a market-to-sales ratio of 334 times. Importantly, ENS is a new type of protocol, and its token has only traded for a short time, with the market determining its value, but currently, ENS maintains a substantial valuation yet to be realized.

The Future of ENS

ENS is not the only player in this space, but it has created a clear path for its adoption by thoughtfully building a protocol that integrates with our existing world. As more individuals and companies use ENS, the fee revenue for ENS could increase significantly. Additionally, as a naming protocol, ENS can support other protocols, blockchains, and domain names, meaning its growth is not limited to the Ethereum network.

Ultimately, the benefits that public goods like ENS can bring are difficult to assess accurately, and the governance value of these early new internet protocols is also vague. While the valuation of ENS may lie in the fact that the protocol is likely to generate higher revenue, the market for creating an identity layer for individuals, websites, and internet transactions is enormous.