Impose a 2.5% royalty on secondary market sales of names

🌱 ENS Ecosystem Ecosystem Discussion
1

I propose that ENS impose a 2.5% royalty on secondary market sales of names. Currently, ENS charges no royalties on secondary market sales.

The primary purpose of the royalty is to serve as an incentive mechanism to prevent the namespace becoming overwhelmed with speculatively registered names. More specifically, the royalty dis-incentivizes name speculation, hoarding, squatting, and flipping by cutting into the profit margin of high-volume flippers.

The secondary purpose of the royalty is to provide enough revenue to the DAO to fund ongoing development and improvement of ENS.

This proposal aligns with Article II of the proposed ENS Constitution:
“II. Fees are primarily an incentive mechanism
The primary purpose of registration fees is as an incentive mechanism to prevent the namespace becoming overwhelmed with speculatively registered names. A secondary purpose is to provide enough revenue to the DAO to fund ongoing development and improvement of ENS. ENS governance will not enact any fee other than for these purposes.”

The proposal also aligns with Article I of the proposed ENS Constitution:
“I. Name ownership shall not be infringed
ENS governance will not enact any change that infringes on the rights of ENS users to retain names they own, or unfairly discriminate against name owners’ ability to extend, transfer, or otherwise use their names.”

The royalty would not infringe upon the rights of ENS users to retain names they own or unfairly discriminate against name owners’ ability to extend, transfer, or otherwise use their names. There would be no royalty imposed on the transfer of names. The royalty would only apply to sales of names on the secondary market (e.g. on a marketplace such as OpenSea).

A 2.5% royalty is a common amount for NFT projects. For example, it is the percentage that the Bored Ape Yacht Club imposes on its secondary market sales. More importantly, it is an percentage that is modest enough to retain goodwill in the community. While a higher percentage would be more effective in disincentivizing flipping, it would come with the risk of losing the goodwill and support of the community. I believe that 2.5% is an amount that balances both goodwill and the intended disincentive effects.

In summary, a 2.5% royalty on secondary market sales of names would disincentive the hoarding, squatting, and flipping of names. It would also provide an additional passive income stream to the DAO to fund development and improvement to ENS.

21 Likes
2

Cautiously in favour of this. If progressing to a proposal I’d suggest the snapshot should use ranked choice voting and let delegates choose from several options for the royalty rather than fixing it at 2.5% or nothing.

23 Likes
3

This is tricky, if you consider that secondary markets might find a way (don’t they always) to push that royalty cost back onto the buyer, rather than the seller at the point of sale. This would have the opposite of the intended effect, and could develop as an arbitrary boundary to buying an .eth domain name, expanding arbitrary for-profit fees on top of that, and the same type of domain name flipping we have now.

Particularly with the example you gave, OpenSea, I could see them going full TicketMaster. [If you don’t get what I mean by that, they are notorious for arbitrary “service” fees… the only service being their market dominance] I just feel like whatever secondary market is most favorable to sellers would become the most popular, and if a mechanism or platform became available to pass down the royalty fee to the buyer, I’m sure it would become the main market for flippers and squatters. Then we’re pretty much back at the DNS status quo.

I agree with @nick.eth that if it goes to proposal, I would like to see it go to a vote with several options, including 0%. Also, cautiously, optimistically in favor, but it is a slippery slope. Pandora’s Box, if you will. It would be really easy to pass, but near impossible to undo any successful incentive stream once it has been established on a decentralized platform.

I can kind of relate on a personal level to the market dynamics with the case of how EIP-1559 was pitched and sold as “possibly lowering gas fees by up to 90%” when really all it did was lower miner income, and therefore incentive, by about 50%. Markets tend to pass down costs to the edges, almost like a form of gentrification.

10 Likes
4

I guess you can always buy a name from the ENS registrar directly if it’s available.

This is only for stuff listed in Opensea or other such secondary markets.

Additionally, unless I misunderstand how this works you can always transfer the ENS name to someone. No royalties there. And subsequently that means that you can go around royalties by doing an OTC trade.

As for how I feel about ENS royalty for sales of names I am not really sure. Perhaps it’s indeed a good way to sustain the development in the very long run, but need to think about it. It’s not an easy thing to say yes or no to.

And definitely the % should be voted on and should be changeable by the DAO

3 Likes
5

I agree in the long term, but think it might be premature at this point. I share @daylon.eth 's concern that it would be nearly impossible to undo in the future, and given that we don’t know the full landscape of secondary markets yet, I think we should wait to see what the best way to implement this will be.

3 Likes
6

I don’t think this is justifiable as a “sustain development” measure; we have plenty of funds for that right now, and no immediate need for a new income stream. It’s more defensible as an incentive mechanism to add some friction to the secondary market.

9 Likes
7

I like the idea of ranked choice voting.

4 Likes
8

Yes, transfers would be free, as would OTC trades (can’t enforce). Some people use services, such as nfttrader, to get around royalties but this tends only to happen for collections with high floor prices. It’s a pain because the buyer and seller have to connect via twitter/discord/etc. to set up the trade. Thus, I would expect the vast majority of volume to remain on marketplaces such as OpenSea.

3 Likes
9

Yes, the incentive mechanism is the primary purpose. The additional revenue stream is a secondary consequence.

3 Likes
10

I agree that this proposal doesn’t seem justifiable under the “sustaining development” provision.

I also don’t think this proposal would do much against domain squatters.

Most squatters are holding a large number of domains in hope for a 10x or greater return on one or more of them. Having them pay a 2-3% fee on each resell doesn’t change the math for them in any meaningful way.

4 Likes
11

My initial reaction says this wouldn’t have much of an impact - if anything, it’d be a minor impact that only becomes visible over a long period of time and a ton of sales. But then I ask myself if proposals need to have some sort of major impact, and I don’t think they do. In fact, it’s probably super healthy for low-impact proposals to be brought up. Hooray for meta governance!

Is “sustaining future development” a factor for this?

So far, the replies above are weighted towards “no.” However, to truly answer we’d need to analyze the current treasury, the burn rate, the revenue streams, etc. etc. Even if the treasury is “full” right now, it’d be good to zoom out and think of future scenarios where it’s not full. A slowdown of registrations, for whatever reason, is possible. A crazy, multi-year bear market is possible.

It doesn’t hurt to make contingency plans in the form of more revenue streams.

Is “disincentivizing hoarding/squatting/flipping” a factor for this?

Some great discussion has occurred above regarding this point. @daylon.eth pointed out that OpenSea could become TicketMaster-esque, but I’d counter that they already have this potential with or without ENS secondary sales. ENS adding a percentage is a drop in the powerful ocean (or, sea, heh) that is OpenSea.

@lefterisjp pointed out that you could still buy a name from the ENS registrar directly if it’s available, which is good to note.

I don’t think a secondary fee would increase the amount of names being purchased, and it might actively decrease it for whales/flippers have had their bottom line decreased by 2.5% across the board.

Regardless, if it were to come to a vote, I agree with multiple percentage options like 0%, .5%, 1%, 2.5%, 5%.

I don’t necessarily have a strong opinion here and am mostly exploring some of the points and trying to provide some more perspective.

Another thing to think about: the general implications of the first proposal from a DAO with as much attention as ENS.

Here are a few devil’s advocate questions, if this ended up being the first officially-voted-on proposal from the ENS DAO:

  • What would the community’s gut reaction be? Would dissenters call it greedy? Who could those dissenters be?
  • Does it feel like it’s too soon and the DAO is chomping at the bit to do something? (I understand this is merely a temperature check, but, pretend with me)
  • Is this proposal too low impact? Too high impact? (See top of my reply for my thoughts)
1 Like
12

I do feel like this is a slippery slope. You can justify just about any amount of revenue-gathering with the threat of future drought.

I doubt this will be first - I expect a proposal to claim the funds and control of ENS infrastructure from the multisig will probably squeak in ahead of it!

13

It’s definitely a slippery slope. I’m eager to hear others’ thoughts on this. It’s an interesting discussion.

Makes sense! Still figuring out the ropes of usual governance things :smiley:

2 Likes
14

This. Regardless of how justified the change would be or not, we should be mindful of how could be perceived if the first motion the DAO passes is to essentially line it’s own pockets.

More generally though, as an active trader I do no balk at seeing a 2.5% royalty fee. The consensus in our DAO is that 10% is quite typical for any NFT secondary sales.

1 Like
15

This seems to be easily circumvented. A user can simply wrap his NFT and never “sell” it again. Suppose Open Sea creates a contract that holds all the NFTs on sale: a user could send their NFT to Open Sea contract, and then sell it there. All internal sales would be NOT be considered a secondary sale. Even worst: suppose coinbase creates a NFT market where you need to send you NFT to them. Now all sales happens off chain in Coinbase and no royalty is ever paid.

If more projects used these secondary market royalties, then it would encourage that behavior which in the end is worst for the overall user experience where the user really owns their collectibles.

2 Likes
16

Domain flipping is a big annoyance in web2 so disincenivising that would be a good idea. Whether this is the way to do it I don’t know, but I like thinking about throttling this undesirable behaviour.

This sounds like it should be a DAO-controlled variable, not even with limited options but as a free-float delegate choice.

There are more short-term priorities sure, but seeing as this is a topic that will undoubtedly (re)surface in the DAO lifetime we may as well start thinking about a potentially “right” way to do this.

I’d not even be principally against a 50% transaction fee if it can be done in a way that prevents bad behaviour and rewards good behaviour.

On that note @boredape93: how do you feel about a airdropping the % royalty to all ENS domain (not token) holders as ETH? It would hurt speculators and support actual users.

Not if they want to actually use the ENS system though right? Proxy contracts are not able to do contract calls are they?

1 Like
17

Not sure I understand your point. One can absolutely do a contract that holds ENS in behalf of others, and one certainly can do it without a contract with a trusted setup. It would be incompatible with tons of other stuff, like a wallet would not display that as “yours” if it was just looking at the system.

But if such royalties become common, and a solution for them becomes common, there’s no reason a future Twitter NFT integration could not simply ping Coinbase’s API to check what other NFTs the user owned off chain. Long term it would encourage not holding your own name and it’s bad for the overall ecosystem.

18

It was a compatibility argument yes. I think the conclusion is that we both feel like there needs to be friction to prevent scalping, but not too much friction that the ecosystem is against it and starts making workarounds.

19

Just out of principle I think this shouldn’t even be considered as one of the first few proposals, because those are symbolic and I think the symbolism value of this idea is weak if any. But reading through this thread I see good arguments for and against, with no rush needed.

4 Likes
20

I’m not sure adding a royalty would actually disincentivize flipping, I think it might just raise prices from those doing the squatting. In which case, I think maintaining a 0% royalty is probably best so people have a better chance of buying their desired ENS name, even if someone already bought it.

Wouldn’t it be worse if a squatter decided to just sit on a lower value name because the royalty made it un-profitable to sell?

2 Likes