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Cryptocurrency enthusiasts are fond of comparisons between the early years of the internet and the digital gold rush for blockchain-based assets and inventions. The auction of domain names ending in “.eth,” for Ethereum (ETH), an alternative cryptocurrency, could be one, but nothing in the annals of domain-name land grabs ever looked quite like this.

Some cryptocurrency investors are bidding to register names under the Ethereum Name Service (ENS), not as high-risk, high-return digital brand buys, as Internet pioneers did, but as a safe place to park their ether, much as normal people use a certificate of depost (CD) for their cash. Others are building systems to collateralize those investments, layering financial innovation atop financial innovation. How this works reveals the enthusiasm for smart contracts and arcane economics that is a defining feature of Ethereum’s rise — and the unintended consequences it can lead to.

Bitcoin’s rise against the dollar this year has been giddy, but it’s a tame ride compared to Ethereum, which Thursday was up 32X since Dec. 31, according to cryptocompare. The gold rush for .eth names is founded on more than search engine marketing or clever branding. The names will make Ethereum as easy to use as cash is on Venmo, replacing long strings with easily remembered words. Sending your ether to 0xbb9bc244d798123fde783fcc1c72d3bb8c189413 may be thrilling, but it presents the possibility of fraud and error.

Dark Domains

The biggest ENS auction winner as of Thursday, according to etherchain.org, had committed 39,711.8 ETH (10.2 million USD), claiming 31 domains. Purchases like “tickets.eth” and “investor.eth” seem straightforward enough, but one wonders what he, she or they have in mind for “darkmarket.eth,” “silkroad.eth” and “assassin.eth.”

Using those names for their ostensible purpose on Ethereum would be, as Bitcoin core developer Jeff Garzik told Gawker in 2011, “pretty damned dumb.” But some of Ethereum’s largest investors have no plans to do any such thing. Token Report talked to two of them; their comments are below, but first, here is a brief explanation of the Ethereum Name Service (ENS) auction.

Arcane Economics

ENS is selling .eth domain names in a Vickrey auction, a sealed-bid, second-price auction designed to induce bids closer to the item’s true value than the English auction format favored by Christie’s and Sotheby’s. The Vickrey auction’s history and economics are interesting (more here), but this isn’t the twist that is enabling investors to park cash in .eth names. The twist, laid out in this early blog post by an ENS contributor, is this: Auction winners don’t spend the ether they bid on a domain name; instead, they lock it up in a smart contract. After one year, the winner may release the domain and recover the ether amount in full.

Enough people find this attractive that one enterprising developer is working on a smart contract for securing loans using ENS domain names, as outlined in a Reddit thread started five days ago.

The Hodlers Speak

“I see it as a ‘nearly free option’ on valuable domains, while parking your money in somewhere safe,” one investor wrote to Token Report. “Well, as safe as the Ethereum network, but that’s about as good as you can get.” Token Report quotes crypto investors anonymously, as a policy.

“My gut feeling is that in a year, each domain will either have proven its worth and be sold or used at a profit,” this investor went on, “or it’ll have just been a safe deposit box to store the money for a year or so and pull it back afterwards.”

Nick Johnson, an ENS developer, told Token Report he thinks the practice is somewhere “between harmless and annoying,” given the intent of the domain name auction was to set up an incentive not to squat on a domain.

“We knew from the start there’d be a lot of ‘hodlers’ with ether to spare, who don’t mind parking it somewhere,” he wrote in an email. “I think we underestimated how many people would want to ‘park’ it on a domain.”

Johnson said if he had it to do again, he’d apply a 0.5 percent fee to the winning bid, to impose a minimum cost on buying a domain.

That may not have worked. “Half a percent is not an issue,” said another investor. “Liquidity might be an issue, but for people who’ve got 8 trillion ether it’s not an issue.” That number is hyperbole, of course. As of Thursday, the total supply of ether was 92.32 million and there were 13 addresses holding more than 0.5 percent of the total, according to Etherscan.

The Opportunity that Never Knocks

In a traditional CD, a buyer locks up cash, giving up liquidity in exchange for a small return and near-zero risk. A .eth domain name locks up ether in exchange for a small negative return and a potential upside in the value of the domain name that’s tied to the locked-up ether.

But the cost of capital for Ethereum holders is lower than it is in a CD. Ether isn’t liquid like cash. It’s more like an over-the-counter stock: a broker is needed to exchange a large amount for a fiat currency like the US Dollar.

Right now, the ENS domain name auction is the only way an investor can get returns on ether, without shorting Ethereum or trading it. For a large holder who expects Ethereum to rise over the long term, it’s an attractive vehicle.

Casper, the Gambling Ghost

That will change if Ethereum adopts a new governance algorithm called Casper. Described as consensus-by-bet, Casper is designed to avoid the decentralized decisionmaking problems that have troubled Bitcoin, by allowing ether holders to bet on outcomes for the system and incentivizing them to bet on outcomes they believe most others will also back.

Without Casper, Johnson concedes, the cost of capital for parking ether by locking it in a one-year deed for domain name ownership was not as high as ENS’ architects expected. In other words, the arcane economics of the ENS domain name auction created this unintended consequence because another set of arcane economics posited by Ethereum developers hadn’t come online yet.

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Token Report is an independent news and research company founded by Galen Moore and Peter Vessenes. Galen is a financial journalist with a background in startups, venture capital and launching news sites. Peter is a co-founder of the Bitcoin Foundation, and launched the first VC-backed Bitcoin company in 2011. He is managing director at New Alchemy, a boutique consulting and investment group based in Seattle, Wash., that is making a pre-seed investment in Token Report.​

Photo of cash under a mattress by IMTFI, CC BY-SA 2.0.

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