Price Discovery for Domain Names with Shell Protocol
Price Discovery for Domain Names with Shell Protocol
What is missing here for a more efficient domain trading market?
GM Namefiers and Domainers!
Last week we hosted a twitter space with the CEO of Shell Protocol, Kenny White (@Dark__Kenny__). The space was indeed juiced up with so much insights and un explored territories in the domain trading market.
How do we pursue open software systems while still delivering ultimate user experiences enjoyed in Web2 (close software systems)?
how is Web3 delivering better capitalism for competition and resource allocation?
What is missing in the price discovery mechanism for further financializing domain names for the purpose of lending?
Is an NFT automated market maker a solution?
Can machine learning algorithm unveiling the next .ai territory for domainers?
How is Namefi going to solve the problem of domain name ‘price discovery’, which can essentially be used by any other RWA NFTs (such as IPs)?
What would the domain name market look like in 5 years?
the dream and execution of domain co-ownership through fractionalization
Some highlight quotes from @Dark__Kenny__ and @ZainanZhou:
@Dark__Kenny__
When I consider why NFT borrowing and lending haven't gained traction like traditional token lending, it seems that the challenge lies in determining the value of non-fungible tokens (NFTs).
Unlike fungible tokens where prices are readily discernible due to consistent interchangeability, NFTs lack this uniformity. This valuation uncertainty poses challenges for using NFTs as collateral for loans.
Considering the growing trend of real-world assets becoming NFTs, establishing a robust NFT market for domain names could pave the way for similar platforms handling diverse assets.
Returning to one of our initial discussions on the benefits of composability and the absence of lock-in effects in DeFi and Web 3, it becomes evident that in our open, permissionless, and composable ecosystem, competitors aren't necessarily adversaries. This phenomenon is observable throughout the ecosystem, where even projects engaged in fierce competition find areas of overlap and collaboration. Take, for instance, 1inch and Uniswap—while there may be tensions between them, the reality is that a significant portion of 1inch trades are routed through Uniswap, and vice versa. This symbiotic relationship underscores how the open and permissionless nature of Web 3 transforms competitors into co-builders, fostering collaboration and innovation.
@ZainanZhou
Domain tokenization is inevitable. We're already making strides in this direction, and we can expect more players to enter the field. Real-world asset (RWA) NFTs will see increasing issuance, with domain names likely being among the more straightforward assets to enforce.
Namefi stands out in pioneering this approach by offering sophisticated built-in metadata for its NFTs. By categorizing domains into subdomains, 2nd-level domains, and top-level domain categories, Namefi facilitates easier searching and browsing for users. This functionality, combined with the potential for public contribution to categorization methods, enhances the tradability and utility of domain names in the NFT marketplace.
You categorize them into subcategories, and then people can make offers within those subcategories. That's how I envision it happening. Hopefully, we can achieve it. Presently, OpenSea manages this in a more centralized manner.
We're optimistic that an automated market maker for NFT protocols could handle this process in the future.
The following is the edited and improved transcribed for better reading purposes:
An introduction into Shell Protocol
Kenny White Shell Protocol
We began as an automated market-making liquidity pool protocol, initially focusing on stable coins.
Our aim was not just to be an AMM like Curve but to have the LP tokens of that AMM be an asset usable in DeFi.
As we developed this, it was relatively successful, but we realized two fundamental and generalizable problems we needed to address.
First was composability—the ability to use multiple DeFi protocols together as an ensemble to achieve goals.
The second was on the EMM side, specifically regarding how to create a sufficiently flexible bonding curve that's truly programmable.
This led us to build Shell v2, which has two main components.
Firstly, it sees DeFi protocols as modular pieces of business logic that plug into a shared accounting system.
Secondly, we developed our own bonding curve algorithm called Proteus, which allows for concentrated liquidity with fungible LP tokens, enabling liquidity concentration in different price ranges.
Recently, we launched Shell v3, which integrates and composes external DeFi protocols. With this technology, we're building a super dApp — a single interface that provides access to as many DeFi protocols as possible across multiple chains. This is what we're using the Shell protocol to develop currently.
Debate on Close System and Open System: Companies Web3 must balance performance with decentralization
Victor Zhou🍊🛡️Namefi.io
It's great to hear directly from you. Our shared vision emphasizes the importance of composability and interoperability, which underpins Shell's version 2 as a super dApp. Just yesterday, a friend, also a renowned NFT advisor and the original author of the NFT ERC-721 standard, expressed frustration with vendor lock-in issues. Major platforms like Microsoft and Google make migration difficult once you're locked into their ecosystem.
This problem, known as vendor lock-in, poses challenges for businesses due to the complexities of migrating accounts and data formats. In contrast, Shell leverages permissionless and interoperable technologies in DeFi to create a more user-friendly experience and powerful applications. For instance, domain traders, initially drawn to ENS, now have options like Vision.io, a marketplace allowing direct ENS registration—a feat previously unimaginable in traditional tech.
This paradigm shift in DeFi, where Shell builds a super dApp for decentralized exchanges, is exciting and offers immense potential to better serve users.
Kenny White Shell Protocol
The issue of vendor lock-in and its pervasive nature in companies is quite insidious.
I don't want to solely blame those running these companies; they're merely responding to the incentive of profit maximization. However, while vendor lock-in may boost company profits, it ultimately weakens the overall ecosystem and market health.
As an economist, I find this particularly concerning. Additionally, as a builder, I see the detrimental effects firsthand. In the early days of Web 2.0, there was a level of composability and openness among platforms like Facebook and Twitter. Third-party developers could build apps on top of these platforms, fostering innovation.
However, over time, companies like Facebook realized the potential risks and closed off their platforms. Consequently, we now witness a siloed internet dominated by a handful of mega-apps and networks. This consolidation limits opportunities for smaller platforms and websites, which is disheartening.
Yet, I remain optimistic about DeFi and Web 3.0. While the incentives for vendor lock-in still exist, the open nature of Web 3.0 inherently challenges such practices. If a protocol aims to lock users into its ecosystem, it contradicts the principles of decentralization. On Web 3.0, being closed-off defeats the purpose.
Instead, companies in this space must balance performance with decentralization. If they opt for a closed-off approach, they might as well operate within the confines of Web 2.0. This realization should keep us accountable in the long run, emphasizing the value of a composable ecosystem that fosters innovation and inclusivity.
Victor Zhou🍊🛡️Namefi.io
That's absolutely true. Lately, I've been pondering how challenging it would be to explain email's superiority over fax to someone from 1995. Similarly, I liken today's banking system to a fax machine—limited options and obstacles. In contrast, DeFi and Web 3.0 are like email, offering versatility and accessibility.
Just as you can choose various email clients, in DeFi, you're not bound to a single system, allowing constant access and choice. Shell's vision of version 2 extends this by seamlessly integrating with other DeFi components for added convenience.
Businesses naturally seek to attract and retain users, but in an open ecosystem like DeFi, this happens organically. Unlike in Web 2.0, where trapping users is common, here, the focus is on creating value to keep users engaged. This optimism stems from the fact that attracting users is easier than trapping them—a dynamic unique to blockchain and DeFi.
NFT Automarket Making (AMM) for Batch Dutch Auctions: leveraging NFT AMMs to pioneer new domain name markets
Kenny White Shell Protocol
The advantage of composability is best exemplified by Shell. We developed an NFT AMM enabling unique functionalities like batch Dutch auctions for NFT groupings, driven by our specific objectives. Then, Victor, your team introduced the idea of transforming domain names into ERC-721 tokens, creating a marketplace.
When we crossed paths at a conference, we realized the potential synergy: leveraging NFT AMMs to pioneer new domain name markets. This illustrates the power of composability—it's not merely additive but multiplicative. By combining our efforts, we achieve far greater outcomes, creating a dynamic ecosystem with diverse Lego-like components.
Moreover, as others introduce innovations, such as NFT lending platforms, the ecosystem expands further. We can seamlessly integrate these advancements, enhancing trading and lending possibilities. This collaborative approach not only attracts users more effectively but also enables us to leverage each other's work, resulting in a more sophisticated and comprehensive system than traditional domain name trading services.
Victor Zhou🍊🛡️Namefi.io
Wow, I didn't realize you'd already built this. That's fantastic! Tokenizing domains opens up the possibility of bundling them together, which is a major advantage.
Kenny White Shell Protocol
Yeah, exactly. So, like, one thing we can do is, if you're familiar with liquidity bootstrapping pools—like, I think Balancer has one—you could say we have a version of that, but it's sort of a hybrid between Uniswap v3 and these Balancer liquidity bootstrapping pools.
So, let's say there's a whole bunch of domains that are relatively similar or just a whole bunch of domains that someone has, and they want to auction them all off at once. They could use this type of pool to accomplish that.
DeFi Fundamentals: English Auctions, Dutch Auctions, and Bonding Curve
Kenny White Shell Protocol
There are a couple of different auction formats. The most familiar one is the English auction, often depicted in movies or seen at places like Sotheby's.
In an English auction, the price starts low, and bidders increase it until no one bids higher.
A Dutch auction, on the other hand, begins with a high price that decreases over time until a bidder accepts it. The first bidder secures the item at the current price.
Now, a batch Dutch auction combines this concept with bundling. Imagine I want to sell 10 domain names. I group them together and set a decreasing price curve. Initially, the first domain might be $100, the second $200, and so forth. With each passing minute, the price of each domain decreases until someone purchases one. This process continues until all domains are sold.
This approach offers price discovery, revealing the market's true valuation of the items.
Auctions compel bidders to disclose their perceived value, ensuring fair deals for both buyers and sellers.
Discussions and Problem Statement of Floor Price for Domain Names or NFTs in general
Victor Zhou🍊🛡️Namefi.io
Hey Kenny, thanks for explaining price discovery through auctions. It's challenging to lend or borrow without a clear price point, as everyone values things differently. However, with bidding, participants indicate their valuation, providing a basis for lending decisions.
For instance, if someone bids a certain amount, it signifies their perceived value. This could then be used to assess whether to extend a loan, perhaps with the domain as collateral. Did we touch upon this topic? If not, do you think it's something Shell has already explored, or would it be worth considering in the future?
Kenny White Shell Protocol
I find this topic very intriguing. Currently, we haven't developed any lending protocols or primitives in-house.
When I consider why NFT borrowing and lending haven't gained traction like traditional token lending, it seems that the challenge lies in determining the value of non-fungible tokens (NFTs).
Unlike fungible tokens where prices are readily discernible due to consistent interchangeability, NFTs lack this uniformity.
For instance, I can easily ascertain the value of my USDC or ETH by checking exchange rates. However, with NFTs, such as domain names or digital collectibles like Bored Apes, their uniqueness complicates valuation.
For example, if I own "kenny.com," and I see "victor.com" sold for $100,000, it doesn't directly translate to the value of my domain because each NFT is distinct. Similarly, a Bored Ape selling for $200,000 may not reflect the value of my own Ape due to differences in rarity among traits.
This valuation uncertainty poses challenges for using NFTs as collateral for loans. Lenders typically require collateral to exceed the loan amount, but without a clear valuation, it's difficult to determine appropriate loan terms and interest rates. Moreover, when borrowing an NFT, the lack of valuation makes it uncertain how much collateral in fungible tokens is needed.
While I'm not deeply versed in current NFT lending practices, I recall Blur experimenting with a model where lenders bid on loan terms. However, its complexity raises questions about its practicality.
Considering the growing trend of real-world assets becoming NFTs, establishing a robust NFT market for domain names could pave the way for similar platforms handling diverse assets. Yet, the challenge remains in devising effective borrowing and lending mechanisms for NFTs. While I have some conceptual ideas, I can't claim they're foolproof solutions—just preliminary thoughts.
Victor Zhou🍊🛡️Namefi.io
Yeah, I believe one significant hurdle hindering the development and expansion of the NFT lending market is the inefficiency in trading. Unlike fungible tokens where assets are essentially interchangeable, such as my USDC being equivalent to yours or my ETH to yours, NFTs lack this straightforward comparability.
In the case of fungible tokens, when observing a trading pair at a certain price, it's generally understood that one can exchange their USDC for a comparable amount of ethers, accounting for minor differences like bid-ask spreads across various marketplaces. Any significant price disparities prompt arbitrage actions to realign prices.
However, with NFTs, the trading landscape is far more intricate. While bundling assets for auctions, as you've been doing, is undoubtedly beneficial to the NFT marketplace, there remains a need to establish methods for trading and lending NFTs in a more fungible manner.
Currently, discussions often revolve around the "floor price" concept, where offerings on platforms like Seaport or OpenSea set a baseline price for items within a collection. This approach simplifies valuation, providing a standardized value irrespective of specific traits or attributes of individual items.
However, the lending sector for NFTs remains relatively inactive. Yet, devising improved methods for lending and borrowing NFTs with some degree of fungibility could offer significant advantages, particularly for domain traders and enthusiasts.
Kenny White Shell Protocol
You're absolutely correct. I share a similar perspective with you, where establishing floor prices for different NFTs simplifies borrowing and lending processes. Knowing that there's a minimum value ensures a degree of security for lenders and borrowers alike.
For instance, even if we don't precisely know the value of our individual assets, setting a floor price provides a reference point. If, hypothetically, we determine that even the least desirable ape is valued at $100,000, then it's reasonable to assume that a semi-rare ape would be worth considerably more. Using this knowledge, borrowing against such assets becomes more feasible and reassuring for potential lenders.
However, a pertinent question arises regarding how to establish floor prices for domain names. While it's relatively straightforward for profile picture NFTs, grouping similar assets and determining a collective floor price, domain names present a unique challenge.
The value disparity between, for example, kenny.com and a seemingly random string domain like x3722118.io is evident. Establishing floor prices requires a nuanced approach to categorize domains based on their inherent qualities.
Factors such as domain length, keyword relevance, and extension rarity all contribute to valuation but pose challenges in defining distinct levels or strata for different groupings.
Thus, determining how to categorize and assign floor prices to various types of domain names presents a complex yet crucial aspect of facilitating lending and borrowing within the domain market.
Namefi is pioneering in categorizing domain names
Victor Zhou🍊🛡️Namefi.io
Yeah, that's indeed a significant challenge. I haven't delved deep into exploring solutions for this within the DNS domain sphere. However, we can draw insights from prior endeavors like ENS. Initially, ENS didn't incorporate NFTs, so discussions about establishing floor prices weren't prevalent. Yet, with the emergence of platforms like Vision, they've devised methods for users to purchase collections.
These collections encompass various subcategories such as the 999 club, 10k club, and so forth, along with distinctions like English names, English mail names, English words, and cultural subsets. Domains can thus be grouped into collections based on shared characteristics, much like how NFTs are organized. For instance, a domain like "shellprotocol.io" could belong to both the "shell" and "protocol" categories, each carrying its own floor price.
I envision a future where domains are classified into multiple subcategories, each with its own floor price determined by market demand. Sellers would then decide which category to list their domain under, typically opting for the one with the highest floor price.
Namefi stands out in pioneering this approach by offering sophisticated built-in metadata for its NFTs.
By categorizing domains into subdomains, 2nd-level domains, and top-level domain categories, Namefi facilitates easier searching and browsing for users. This functionality, combined with the potential for public contribution to categorization methods, enhances the tradability and utility of domain names in the NFT marketplace.
Kenny White Shell Protocol
I was pondering if there's a solution to the problem statement lingering in my mind—how to establish floor prices for NFTs or domain name NFTs.
Victor Zhou🍊🛡️Namefi.io
Yeah, you categorize them into subcategories, and then people can make offers within those subcategories. That's how I envision it happening. Hopefully, we can achieve it. Presently, OpenSea manages this in a more centralized manner.
We're optimistic that an automated market maker for NFT protocols could handle this process in the future.
Using AI for categorising and domain appraisals?
Kenny White Shell Protocol
I wonder if, at the risk of using a buzzword in an unconventional context, this might be a suitable use case for AI or machine learning. Specifically, in terms of generating categories, my line of thinking revolves around the dotai domain namespace. About five years ago, it held decent value, but with the rise of OpenAI and Chat GPT, we've witnessed an AI boom, reflected in the proliferation of dotai domains.
While I'm not deeply immersed in the domain name market, I presume that those who invested early in dot AI domains have likely reaped substantial gains. This leads me to consider whether latent categories within the domain name space could be unveiled using a machine learning approach. By analyzing price correlations over time, it might be possible to discern emerging categories. Admittedly, I'm uncertain if this strategy is feasible, but it's an idea that crossed my mind.
Victor Zhou🍊🛡️Namefi.io
I believe that's indeed one approach. For instance, .ai serves as a compelling example. Originally, dotai denoted Anguilla, a British overseas territory—an island, essentially. However, its fortuitous overlap with the abbreviation for artificial intelligence transformed it into a valuable asset. This collision of meanings bestowed upon it an unexpected premium in the domain market.
As a result, domains ending with dotai command significant premiums. Furthermore, dotai has consistently increased its prices, demanding over $70 annually for registration. Notably, they impose a minimum two-year renewal requirement for registrations, effectively charging $150 to $180 for each domain. This pricing strategy contrasts starkly with the more typical $15 to $20 annual fees for a .com domain.
Indeed, the domain name landscape is rife with complexities and intricacies that warrant further exploration.
Domain Name Market in 5 Years: Co-ownership through Domain Fractionalization
Kenny White Shell Protocol
Well, Victor, how do you envision the future of the domain name market unfolding in the next five years?
Victor Zhou🍊🛡️Namefi.io
I believe that domain tokenization is inevitable. We're already making strides in this direction, and we can expect more players to enter the field. Real-world asset (RWA) NFTs will see increasing issuance, with domain names likely being among the more straightforward assets to enforce. Unlike physical land deeds, where explaining ownership to authorities can be complex, domain ownership enforcement is digitized.
Namefi exemplifies this process, facilitating domain ownership enforcement on-chain. In five years, I foresee this becoming not just feasible but perhaps the preferred method of domain ownership. While businesses currently using domains may not be heavily incentivized to transition, those purchasing domains for future use or potential trading will find tokenized versions more convenient.
Furthermore, for entities like Shell and other DAOs seeking true co-ownership of domains, tokenization offers a streamlined solution. Instead of relying on trust or centralized control, smart contracts can facilitate genuine co-ownership arrangements. Namefi plans to leverage this characteristic of tokenized domains for innovative purposes, which we're excited to unveil soon.
In summary, I anticipate that in five years, tokenized domain ownership will become increasingly prevalent and advantageous, offering streamlined processes and innovative possibilities for both individuals and organizations alike.
Kenny White Shell Protocol
You brought up something truly intriguing. Imagine owning just a millionth of a premium domain name. While this might seem abstract, it carries fascinating economic implications. We could potentially tokenize these shares and create a decentralized exchange or liquidity pool where people could buy, trade, and speculate on the value of these partial ownership shares.
This concept introduces my current favorite phrase: price discovery. With price discovery comes a plethora of opportunities, including borrowing, lending, and various other financial services. For instance, let's say you own 10% of kenny.com, and these subshares are actively traded. You could leverage your kenny.com shares as collateral to secure a loan. Alternatively, you could borrow kenny.com shares from someone else who's lending them out.
Victor, it seems like you're onto something quite significant here.
The market and product are vast and challenging: Namefi embraces competitors
Victor Zhou🍊🛡️Namefi.io
Absolutely! I'm thrilled you resonate with the concept. "Price discovery" truly is the phrase of the hour, bringing us back to your roots as an economist. With DeFi, there's ample room for experimentation, leading to increased market efficiency. Price discovery plays a pivotal role in achieving this efficiency.
Currently, many domain traders and investors face challenges due to the lack of financialization within the domain market. They're unable to borrow against their domains or take out mortgages, often requiring full cash purchases and holdings. Additionally, the absence of mechanisms for co-ownership limits their ability to capitalize on growth potential.
However, this landscape is poised to undergo significant transformation in the near future. Through our efforts, along with those of our competitors—whom I prefer to see as co-builders sharing our vision—we're driving change within the industry. Our collective aim is to seamlessly integrate into comprehensive DeFi ecosystems like your envisioned Shell super DApp. This integration will grant Namefi and our peers enhanced access to the financial aspects of domain names, revolutionizing the domain market as we know it.
Kenny White Shell Protocol
I appreciate your acknowledgment of the dynamic between competitors, or as you aptly put it, "co-builders." Returning to one of our initial discussions on the benefits of composability and the absence of lock-in effects in DeFi and Web 3, it becomes evident that in our open, permissionless, and composable ecosystem, competitors aren't necessarily adversaries. Instead, what we're collectively constructing, along with our supposed rivals, can be harmoniously combined to create something greater than the sum of its parts.
This phenomenon is observable throughout the ecosystem, where even projects engaged in fierce competition find areas of overlap and collaboration. Take, for instance, 1inch and Uniswap—while there may be tensions between them, the reality is that a significant portion of 1inch trades are routed through Uniswap, and vice versa. This symbiotic relationship underscores how the open and permissionless nature of Web 3 transforms competitors into co-builders, fostering collaboration and innovation.
Victor Zhou🍊🛡️Namefi.io
Absolutely, Kenny, I couldn't agree more. As we wrap up this discussion, it's fascinating to reflect on Shell's journey—from being an ambitious newcomer competing with various lending protocols to now successfully establishing itself as one of the most prominent players in the field. What's even more remarkable is Shell's evolution into a collaborative force, synergizing with other platforms and leveraging the collective strength of every decentralized exchange.
Indeed, this is the future we're stepping into—a future where collaboration supersedes competition, where we co-build and enhance each other's offerings. The beauty of it all lies in the fact that, whether they realize it or not, we can build upon our co-builders, even our competitors, all for the benefit of our users. Our shared goal remains unwavering: to serve our customers and users in the best possible way.
In this spirit of collaboration and mutual growth, I see a bright and promising future unfolding within our economy and ecosystem.
An Economist's view: Web3 - a better Capitalism
Kenny White Shell Protocol
Absolutely, and I find myself pondering how to articulate this sentiment effectively. To delve into a bit of philosophy, capitalism serves as a potent paradigm, employing markets, prices, and property ownership to allocate resources and manage economies. However, I can't shake the feeling that unchecked pursuit of profit often leads societies down a troubling path, where the relentless drive for profit maximization fosters a focus on short-term gains and resource exploitation rather than long-term value creation.
With the advent of Web 3's openness and permissionlessness, I hold onto the hope that individuals will be incentivized to prioritize value creation over profit maximization. Unlike the zero-sum game often associated with capitalism, I envision a future where collaboration and innovation transform the economic landscape into a positive-sum game—a realm where the pursuit of profit aligns seamlessly with the creation of value. My fervent wish is for this positive-sum game to persist indefinitely, heralding a future of boundless potential and collective prosperity.
Victor Zhou🍊🛡️Namefi.io
That's a wonderfully eloquent way to sum it up. I wholeheartedly agree—let's strive to create a positive-sum game, where everyone benefits from each other's efforts, fostering a sense of camaraderie and mutual support rather than a zero-sum competition where one's gain is another's loss. Embracing each other's existence and contributions, we can cultivate a community where everyone thrives.
Kenny, I want to express my heartfelt gratitude for engaging in this conversation with me. While we've had many discussions in private, it's truly an honor to have you join our Namefy space for the first time. To everyone here, I hope you find our dialogue enriching. If you're curious to learn more about Kenny's endeavors and vision within this space, I encourage you to follow him and explore the innovative work being done at Shell Protocol, including their insightful article, "The Ocean."
As we conclude, I wish you all a delightful weekend. Thank you for gracing us with your presence today. Much love to each and every one of you.
Further readings:
https://wiki.shellprotocol.io/getting-started/overview/white-papers