Sovereign Identity: A Comprehensive Guide to Etherum Name Service (ENS)

Ethereum Name Services allows users to translate blockchain addresses into human-readable names.

On the surface, it works like the DNS (we’ll explain this in a second).

It has a MC of $261M, FDV of $1.3B, and its $ENS token trades at $12.89. In 2021, the price hit $85.69.

This article will cover the following:

• What is the DNS?
• What are the problems with the DNS?
• What are Decentralized DNS?
• What is the Ethereum Name Service (ENS)?
• How Big is the Market for Decentralized DNS services?
• What Traction has ENS achieved?
• Who is Behind ENS?
• Tokenomics
• Valuation
• What’s the Long-Term Vision of ENS?

What is the DNS?

Every device on the internet has a unique address — called an IP address — that helps other computers identify it. Unfortunately, this address is represented with a string of numbers such as “198.61.190.243”.

As you can imagine, human beings aren’t very good at remembering random strings of numbers, nor do they provide any context as to what’s on the site. That’s why the Domain Name System (DNS) was created — it serves as the “phonebook” of the Internet and translates IP addresses into human readable names.

For instance, let’s say you wanted to look up www.facebook.com.

1. Your computer would send a request for www.facebook.com to a DNS server
2. The DNS server would look up the name www.facebook.com, find its IP address and send it back to you
3. Your computer would then use this new IP address to make a request to directly to Facebook’s servers
4. Facebook would send the requested webpage back to your computer

The Domain Name System is not just one server, but instead a global collection of servers. That way, if one doesn’t know the address you’re looking for, it can route it to another one. This also provides redundancy in case a single server is attacked or goes down.

While the DNS is extremely important to the internet, it has one major flaw — it’s centralized. This creates numerous risks including the lack of privacy, the potential for censorship and security vulnerabilities.

As such, decentralized DNSs such as the Ethereum Name Service, aim to supplant this ~40 year old system and become the “phonebook” of the blockchain.

What are the Problems with the DNS?

While the DNS is extremely important to the internet, it has one major flaw — it’s centralized.

This creates numerous risks including the lack of privacy, the potential for censorship and security vulnerabilities.

Fortunately, there is a solution known as a “decentralized DNS”.

What are Decentralized DNS?

Decentralized Domain Name Systems (DNS) are an alternative to the traditional, centralized DNS that underpins the internet.

They aim to address the issues of privacy, censorship, and security vulnerabilities present in the centralized DNS by distributing the responsibility of domain name resolution across a network of nodes.

In a decentralized DNS, domain name information is stored on a distributed ledger or blockchain, which ensures that the data is secure, tamper-proof, and resistant to censorship. This approach offers a more transparent and democratic system for managing domain names and offers additional advantages, such as increased reliability and resilience against attacks.

Decentralized DNS services offer several benefits when compared to their centralized counterparts.

1. Security: Decentralized DNS services rely on blockchain technology, which is inherently more secure than traditional centralized systems. This is because blockchains use cryptographic hashing and a consensus mechanism, making them resistant to tampering and hacking attempts. In contrast, centralized DNS services can be more vulnerable to attacks, like DDoS attacks, cache poisoning, or hijacking.
2. Censorship resistance: Decentralized systems, by nature, are distributed across multiple nodes globally. This makes it difficult for governments or other authorities to censor or take down a website hosted on a decentralized DNS service. Centralized DNS services, on the other hand, can be targeted and controlled by authorities, resulting in censorship or shutdowns.
3. Ownership and control: In a decentralized DNS system like ENS, users have more control over their domain names, as they are the direct owners of the associated blockchain assets. This allows users to control their domains without relying on a centralized authority. In traditional DNS, users must rely on registrars and other intermediaries to manage their domains.
4. Transparency: Blockchain-based DNS services offer a higher level of transparency because all transactions and changes are recorded on the public ledger. This allows users to independently verify the ownership and history of a domain. In centralized DNS services, this information is typically managed by a private organization, which may not provide the same level of transparency.
5. Interoperability and extensibility: Decentralized DNS services like ENS can integrate with other decentralized platforms and applications built on the same blockchain, such as Ethereum. This allows for seamless interaction between domains, decentralized apps (dApps), and other blockchain-based services. This level of interoperability is not as easily achievable with centralized DNS services.

Some popular decentralized DNS projects include Ethereum Name Service (ENS), Handshake, Unstoppable Domains, and Namecoin. These projects provide users with human-readable domain names that can be used for various purposes like sending cryptocurrencies, creating decentralized websites, and establishing digital identities in the Web3 ecosystem.

What is the Ethereum Name Service (ENS)?

The Ethereum Name Service (ENS) is the largest decentralized DNS.

It is virtually identical to the internet’s DNS system, in that it translates human-readable names into computer addresses

For instance, without ENS, if you wanted to pay your friend in cryptocurrency, you’d have to know the public address of her wallet, which might look something like “0x787192fc5378cc32aa956ddfdedbf26b24e8d78e40109add0eea2c1a012c3dec”.

ENS allows users to create “nicknames” — such as “Alice.eth” — a and attach them to their wallet, allowing anyone to send any Ethereum enabled token to that address.

ENS operates using two main components, a main “registry” and a collection of “resolvers”.

• The registry contains all the “nicknames” (called domains) registered on the system and the address of their respective resolvers.
• The individual resolvers contain the information necessary to match each domain to its actual Ethereum address.

So if someone wanted to send 10 ETH to “alice.eth” using Metamask:

1. The user would open their Metamask wallet, hit the “send” button and add “alice.eth” as the recipient’s address
2. The system would then query the main registry to find out which resolver is responsible for “alice.eth”
3. The register would return the applicable resolver
4. The system would then query the resolver for the correct address, which would return “0x787192fc5378cc32aa956ddfdedbf26b24e8d78e40109add0eea2c1a012c3dec”

Metamask would then use this new address to complete the transaction

Like the DNS, this all occurs “under the hood”, so from a user perspective they simply type “alice.eth” in the address and the money is on its way.

While ENS originally only worked for .ens names, in late 2021, the protocol announced that it would also be integrating traditional domain names into the system. This opens up a world of potential as it makes it possible to register urls such as “alice.com” to a wallet and allow it to receive cryptocurrencies.

How Big is the Market for Decentralized DNS services?

At first blush, it’s tempting to calculate the potential of ENS using the DNS, which MIT researchers recently valued at $8B

But I believe this significantly understates the opportunity…

Given its potential as a unified #Web3 identity, payment system and decentralized website provider, I believe the TAM may be closer to the $20T market for digital wallets

(more on this at the end of the article)

What Traction has ENS achieved?

ENS is the largest player in the space, with 3.5x the FDV of its nearest competitor

To date it has:

• Registered 2.76M names
• Integrated 511 partners
• Attracted 594K owners

The protocol has achieved significant traction since launch. Since Q2 2021:

• MAUs grew 6.2x (from 9K to 55K)
• Registrations grew 21x (from 53K to 1.1M)
• Revenue (in ETH terms) grew 10.8x (from 1K to 12K)

$ENS is organized as a DAO, and as of December 2022 it has nearly 60K members and $1 billion in its treasury (making it the 3rd largest DAO)

The $ENS ecosystem is vast, and the protocol has over 500 partnerships including:

• Wallets: Coinbase, Rainbow, Trust Wallet
• dApps: Uniswap, Etherscan, Aave, OpenSea
• Browsers: Brave, Metamask, Cloudfare

Who is Behind ENS?

$ENS was launched by Nick Johnson in 2017.

Key team members include Khori Whittaker, Jeff Lau, Makoto Inoue, Leon Talbert, Richard Moore, Muhammed Tanrikulu, Alisha, David Chu, Luc van Kampen and Dom Perri.

Tokenomics

The $ENS token launched in November 2021 with an airdrop to existing domain name holders.

It functions as a governance token — holders can submit proposals and vote on key issues facing the protocol.

The token launched via airdrop in November 2021. Total supply was capped at 100M with the following distribution:

• 25% was airdropped to .ENS holders
• 25% to ENS contributors
• 50% to the DAO

Out of the 100M tokens, 20M are currently in circulation:

• The airdrop vested immediately
• Tokens for core contributors have a 4 year lockup & vesting schedule
• The #DAOs tokens unlock over 4 years (although 10% was available immediately)

While the fact that 80% of the tokens are unissued might concern some, it’s important to remember that 500M tokens (50%) are controlled by the community.

As such, it’s reasonable to assume that these won’t be issued unless it increases the overall value for all holders

Valuation

ENS ‘s FDV is currently $1.4B, and I do not believe it is unrealistic for the token to 50x-100 from here.

This is based on the following assumptions:

• ARPU of $123.35
• 320M owners
• 3x revenue multiple

Let’s look at each

ARPU

Currently, ENS has 594K owners and a total revenue of around $73M

That’s an average revenue per user / owner (ARPU) of $123.35

Ownership

We can assume that ownership can expand to 320M — which is the total number of cryptocurrency owners worldwide

This would imply a revenue of $39.5B

Revenue Multiple

Given #ENS’s potential use as a payment solution, we can apply a fintech multiple of 3x to get a value of $118B

This would represent an ~90 x increase over the FDV today

So not only is 90x possible, but it may be conservative!

• Revenue projections only account for registrations & renewals (not payment and website functionality)
• Crypto adoption is still relatively low
• Fintech multiples are at a historical low- they were 25x last year

For instance, if we bring Fintech multiples to the 2022 average of 6x and assume that ENS achieves a similar penetration to Visa at 1.2B users, that yields a valuation of $888B (>600x return from today)

While this may seem like a stretch, it’s definitely not impossible.

What’s the Long-Term Vision of ENS?

While it’s tempting to think of the $ENS as a replacement for the DNS, in reality it’s so much more than that. It also acts as a:

• Web3 identity
• Digital Wallet
• Decentralized website

Let’s review each:

Web3 Identity

In Web 1.0 we used usernames and passwords to sign in to websites

Web 2.0 allowed us to sign in with Google, Twitter, Facebook, etc…

In Web3, users can use services such as #ENS as a “single sign-on” identity to access all websites

Digital Wallet

$ENS domains aren’t just “websites on the #blockchain”

They are effectively digital wallets

ENS makes it easy for users to send payments directly to websites or other users without going through an intermediary such as Venmo or Paypal.

Decentralized Websites

Users can combine their $ENS address with IPFS (Filecoin’s decentralized storage solution) to create fully decentralized, censorship-resistant websites

Note: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.