Fair Value Creation— Pricing in AZERO.ID

AZERO.ID
6 min readAug 9, 2023

With our mainnet launch just around the corner, it is about time to tell you more about the pricing of our AZERO.ID domains. This blog post will explain how our initial domain pricing works, what challenges exist and how we want to tackle them via a demand-based pricing mechanism.

TL;DR

  • 5+ character domains start at 6 $AZERO for the first year
  • Shorter domains will be sold via unique auction system in the future
  • At start, 2 and 3 year upfront registrations for 5+ character domains include a premium and cost 18 and 36 $AZERO respectively
  • We propose a simple demand-based pricing mechanism to disincentivize domain squatting

Current pricing models are broken

The last years have shown that many on-chain domain services suffer from the problem of domain squatting. This describes the phenomenon where users acquire domains without the intent of using them and based on the sole motivation of reselling them at a higher price.

Domains often hold significant value for individuals or organizations that associate their brand and identity with a specific domain name. This attracts squatters, who buy domains with the intention of selling them at a higher price. This practice leads to many domains never being sold again due to continuous speculation, resulting in an ineffective secondary market. Moreover, the inefficient distribution of unique domains not only diminishes the overall benefit to the community but also lowers the potential for value creation within the broader ecosystem.

Domain squatting is encouraged by low fixed registration prices, which often do not reflect the true value of a domain. This results in minimal carrying costs, meaning that domain squatters can hold onto these domains indefinitely without incurring significant expenses. Consequently, they face no real financial burden, even when retaining the domains for extended periods without making use of them. A solution for this is proposed later in this article.

Starting with 6 $AZERO base fee

To design a sybil resistant namespace, many on-chain domain services rely on fixed renewal fees based on the length of the domain. Usually, the yearly renewal fee for 5+ character domains is around $5–10. This translates to holding costs that are significantly lower than for traditional web2 domains. The low price is possible due to the nature of the blockchain, which creates a trustless environment without the need for expensive controlling middle layers.

In AZERO.ID, domains are initially priced with a base fee that correlates with the number of characters of a domain. At launch, only 5+ character domains with a base fee of 6 $AZERO for the first year are offered. Domains with less characters will be introduced at a later stage with a unique premium auction and a higher base fee.

Base Fee by domain length

Although a simple yearly fee to register and own a domain creates value for a domain ecosystem and prevents domains for being locked away forever in inactive wallets, it is not enough to disincentivize domain squatting. In order to achieve this, we have to reduce the difference between the actual value of a domain and the cost of holding it.

Introducing demand-based renewal fees

Demand-based pricing for on-chain domains is a concept first proposed by Vitalik Buterin. The rationale behind it is to adjust the renewal fee of a domain based on the domains demand over a certain period. This concept could help to mitigate the earlier describe problem of domain squatting. Moreover, it reduces value extraction and increases the overall utility of the domain system for its users.

A basic implementation of demand-based renewal fees could look as follows. We could set the pricing formula that it increases the renewal price for the next period by 1% of the highest bid in the last 4 weeks of the last period. To maintain strong ownership guarantees for the current domain holder, we set a cap for the maximal price increase at 1000%. With a 6 $AZERO base fee, the renewal fee for the second year could increase up to 60 $AZERO if someone offers 6,000 $AZERO for the domain.

Renewal fee curve with basic demand-based pricing mechanism

Since the rationale of the demand-based pricing is to value domains closer to their fair value, the above explained logic would loose it’s effectiveness in multi-year registrations and renewals. Speculators would be incentivized to choose the longest registration period when the registration or renewal fee is still low to have less exposure to the demand factor in the pricing

To prevent this, we could add an exponential factor into the pricing of the renewal fee that basically puts a premium on longer registrations. User’s would be incentivized to assess the fair value of the domain and decide whether to pay the premium upfront or wait and pay the adjusted base fee based on the demand at the end of the period. We will explain more details on this proposed solutions in our upcoming documentation.

Comparison for different registration periods with demand-based pricing

The demand-based pricing mechanism will be further tested and refined over the next months. We expect it to be implemented together with our upcoming native domain marketplace on AZERO.ID.

At our launch, we will set a linearly increasing premium fee for each additional year of upfront registration. Thus, we end up with the following registration fees:

1 year: 6 $AZERO

2 years: 6 $AZERO + 12 $AZERO = 18 $AZERO

3 years: 6 $AZERO + 12 $AZERO + 18 $AZERO = 36 $AZERO

It will be up to the user to decide whether he wants to pay a premium for a stronger ownership guarantee and fixed upfront costs or wait for the demand-based pricing to set the price later this year. Further, we are planning to fix the base fees denominated in USD values as soon as the first audited Oracle providers are live on Aleph Zero. If the $AZERO price will significantly change until then, we will manually adjust the pricing parameter to keep the base fee for 5+ character domains in the range of $5 to $10.

Going forward

We believe that our proposed pricing mechanism is inclusive and affordable for all socio-economic backgrounds. Further, our research on solving domain squatting has identified demand-based pricing as a potential solution to balance ownership guarantees and effectiveness of the pricing mechanism to create an efficient secondary market for domains.

Over the next months, we will continue to research and improve our pricing model aiming to solve the inherent economic challenges in pricing on-chain domains.

About AZERO.ID

AZERO.ID is the leading domain service for the Aleph Zero and Substrate ecosystem. AZERO.ID let’s users aggregate their on- and off-chain identity and solves the UX challenges of complicated wallet addresses. Moreover, leveraging the privacy framework of Aleph Zero, let’s AZERO.ID offers web3’s first privacy-preserving domain system enabling private domain-to-domain transfers.

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AZERO.ID

Your digital identity in one domain. On-chain name service for Aleph Zero and beyond.