Squatting in the current .eth TLD

The current architecture for the .eth TLD uses a vickery auction to choose a winner out of competing registrants, as described in EIP 162.

The interesting thing about the auction is that unlike in traditional auctions, the “price paid” by the winner is not actually paid, but instead is placed on deposit. The registrant can, after some time, withdraw this deposit and deregister the name.

The great thing about the deposit mechanism is that this provides an incentive to deregister a name when it is no longer in use, as having the registration locks up capital. I’m a big fan of that.

The disconcerting thing about this mechanism, though, is that it does not reveal how much someone is “actually paying” for a registration. It doesn’t even let you put a lower bound on the cost of a registration. This is because different actors have different costs of capital for ether on deposit. Specifically of concern is the fact that people who have long ETH positions don’t mind locking up their ether as much as people who might want to sell their ether, or who believe that the price of ether is likely to fall.

Lets assume that all registrant (honest or squatting) will bid their reserve price (Vickery auctions are truthful). However their bid is not actually paid but instead is placed on deposit, and the cost of capital is paid. A rational actor’s bid amount is therefore calculated out of their reserve price and their cost of capital.

Will honest registrants generally have enough ether to place a bid such that their cost of capital is their reserve price? This is unclear. Is it the case that honest registrants have lower cost of capital than squatters? Also unclear.

Worse than this, squatters who know of an honest would-be registrant for the same name may be able to tell that they will only need to keep their ether on deposit for a short time, and therefore have a much lower cost of capital than the honest registrant who intends to keep the name.

For these reasons I expect name squatting to be a problem for the current architecture of the .eth TLD. Thankfully, registrations of less than 7 characters will not be allowed, I think in anticipation of this squatting problem. Also thankfully, ENS is designed to be upgradeable.

However, even if we replaced the current auction mechanism with one where the winner actually directly pays for the registration (a deposit could also be additionally required, so we can keep the great incentive to deregister), there will still be squatting problems.

It is impossible for a registry protocol to determine whether a registration is honest or squatting without oracles. These fully objective and economic mechanisms are therefore fundamentally squattable. They can increase the cost of squatting, but only while also increasing the cost to honest registrants — because they cannot tell the difference between an honest registration and squatting.