Why Does ENS Need Annual Fees?

Come May 4th, 2019, the Ethereum Name Service (ENS) will transition from an auction and deposit system to an instant registration and annual fee one, in which users can instantly register new names, and owners of most .eth names will need to pay $5 in ETH a year to keep them.

Why are we making this change? This article will explain our reasoning on the subject.

It’s important to note the ENS team did not come to this conclusion lightly or privately. Rather, it is the result of at least a year and a half of public discussion.

ENS lead developer Nick Johnson talked about the possibility of transitioning ENS to a rent model as long ago as November 2017 in his talk at Devcon3 (you can watch it here). Since then, there have been lengthy discussions on our public forum about whether to have an annual fee, how an annual fee would work, where the ETH would go, and other non-rent alternatives.

We consider ENS to be a public good for the whole ecosystem, and we always welcome the community’s participation and feedback. Our forum remains a place for public discussion and debate about the future of ENS.

Before we get into why we think a rent model is better than a deposit model, we first need to answer: why does ENS need to cost anything at all?

Wouldn’t it be better if users could claim and use Ethereum names for free? Indeed it would, but for one significant problem: squatting.

If name registration cost nothing, after which the owner could keep the name forever, there’d be little to prevent a small group of individuals from quickly registering almost all names people could want.

They could then “squat” on them, doing nothing, effectively suffocating ENS and making it useless, or else charge high prices or even enact their own annual fee system.

In other words, for ENS to be useful, there has a be limiting principle on how many names a person can own for speculative purposes. The best way we can think of how to do that is to have Ethereum names cost something.

In our current model, the winner of an auction has to deposit the amount of the second highest bid (or the minimum bid, whichever is higher) into a contract. If they release ownership of the name, the deposit is returned to them. A deposit model could also work with a fixed deposit amount.

This model had certain advantages:

  • It let people test out ENS with low risk. When ENS launched two years ago, it was something of an experiment. If it didn’t work out or turned out to not be as useful as we thought, people could get their funds back.
  • It side-stepped the question of what would happen with funds if they were spent rather than held and returned.

But it has also had significant limitations:

  • Since users know they can always get their deposit back, it actually doesn’t act as a very strong deterrent against squatting, which is the reason for having a cost in the first place. Why not grab some names and hold them indefinitely since you can always get your ETH back? The only losses are transaction fees and opportunity cost, which, while something, don’t seem to be a significant enough disincentive. Though it’s hard to know for sure, we estimate around 80% of all .eth names are held by squatters.
  • On the other hand, if you plan on keeping a name forever for the purpose of actually using it, the ETH is for all practical purposes spent.
  • What if the private key of a name is lost. Is the name locked away forever? Without some sort of “check-in” system, this could be a long-term problem. Note that unlike other parts of the Ethereum system like public keys, there is a relatively limited number of useful names, so the loss of useful names is more significant.

An annual fee system better solves the problems mentioned above (which might explain why it has been the model for DNS):

  • An annual fee means each year a squatter holds a name they aren’t using, they are losing ETH they cannot get back without any corresponding practical value to themselves. For a squatter holding thousands of names, this can be a significant cost.
  • For a user or business, who might hold only one or a few names, a small annual fee shouldn’t be a significant deterrent from legitimate use.
  • For users intending to hold their name indefinitely for the future, they can pay ahead. For example, a person can pay $50 of ETH and lock-in their ENS name for 10 years.
  • Since you can’t get back fees you’ve already paid, even if you paid ahead for many years, it means that squatters, who likely won’t be paying ahead to save costs, will have the additional logistical burden of renewing names on a regular basis.
  • If the private key that holds a name is lost, the name will automatically be released when its paid registration period runs out.

There will be no rent for DNS domains that are claimed on ENS. For example, after we have completed DNS integration, if the Ethereum Foundation claims ethereum.org on ENS, they can set ENS records for ethereum.org without paying any ENS rent.

Further, just as with our current system, in the new system subdomains will remain free (minus the transaction cost to create them). Subdomains will not have rent.

This means that, e.g., a wallet provider could pay the rent for myexamplewallet.eth and then give out as many subdomains to their users as they want (e.g. user.myexamplewallet.eth). To give users even more confidence in their ownership of the subdomain, the owner of the main name could transfer control of it to a contract that would allow users to get subdomains but not allow the owner to take them away.

If users are concerned about an annual fee not being paid for the main name, and thus leading to the main name and all subdomains being released, we’ve designed the system so anyone can pay the fee for any name. Meaning, if there is doubt about the fee being paid, subdomain users can pay the fee of the main name if desired.

So we have ETH being paid as annual fees. Where should the ETH go?

We have a whole post dedicated to this topic, which you can read here, but here are some quick thoughts:

We could have designed it so all fees are automatically burned. But after much discussion, we concluded that rather than burning it, ENS fees are a good regular source of funding for the ongoing improvement, expansion, and promotion of ENS.

ENS started out as a project of the Ethereum Foundation. Last year, it was spun out as a separate entity, True Names LTD, a Singaporean-based non-profit. Funding has come entirely from grants thus far, mostly from the Ethereum Foundation. Note we have no shareholders, token holders (we never did an ICO), or investors we need to repay, and we are not looking to personally get rich off ENS.

There’s a lot of work to be done to make ENS succeed, and grants aren’t a very good long-term funding plan. It would seem strange to us to be asking other organizations for funding while intentionally burning a significant source of funding native to the project.

We want ENS to succeed as a fundamental part of the growing Ethereum ecosystem. Please always feel free to join the conversation about ENS development on our forum.

And if you’re a dapp developer, remember to integrate ENS!



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