Author of the opinion: Fred Hsu, Co-founder and CEO of D3

A small business owner possesses a premium domain name like organic.shop. They have been searching for buyers for months but cannot sell it at the asking price.

Meanwhile, someone on the other side of the world just purchased a portion of a Manhattan apartment through tokenized real estate in 5 minutes.

This contrast highlights the apparent inconsistencies in our digital economy. While the tokenization market for real-world assets (RWA) is racing towards a $400 trillion addressable market, the domain name industry, despite managing 360 million registered domains and a $10 billion premium segment, remains trapped in the liquidity trap of Web2.

The domain name industry's refusal to embrace tokenization will destroy billions of dollars in value and hand market dominance over to Web3 naming systems like ENS.

Stocks, real estate, and carbon credits have already embraced blockchain-driven liquidity, while domains risk becoming the liquidity-starved dinosaurs of the internet.

Tokenization fundamentally rewrites how valuable assets are traded globally. The total amount of tokenized government bonds now exceeds $7 billion, providing instant liquidity for traditionally slow-moving government securities.

Fractional ownership platforms allow small investors to purchase Manhattan skyscrapers or patent portfolios that were previously only accessible to institutions.

Smart contracts eliminate brokers, custodial services, and paperwork that traditionally slow down asset transfers. Settlements are completed in minutes instead of weeks. Global markets operate 24/7 rather than during specific time zone business hours.

The technological capability to immediately change domain name transactions already exists. The question is why an industry built on digital innovation tolerates analog friction.

Selling a domain today feels very similar to 1999. The average domain sale takes 3 to 6 months, assuming it can be completed. Brokers charge commissions of 15%-30%, while tokenized assets have commissions of less than 1%.

Geographical and capital barriers artificially limit potential buyers. A prominent entrepreneur in Lagos may have a perfect vision for developing a premium domain but lacks access to the traditional payment systems or credit arrangements that domain brokers typically require.

Due to these friction points, less than 1% of registered domains are traded each year. This represents a significant economic inefficiency in a theoretically multi-hundred-billion-dollar market.

When you consider that domains represent purely digital assets, they should have infinitely higher liquidity than physical real estate or paper securities. Instead, their trading efficiency is lower than both categories.

This liquidity crisis creates a chain of problems far beyond slow sales processes. Premium domains represent significant trapped value that, if properly released through modern financial infrastructure, could drive innovation.

Startups cannot use domains as collateral for decentralized finance (DeFi) loans because traditional banking systems do not recognize digital assets. DeFi protocols cannot verify domain ownership through traditional registrar systems. This financing gap limits entrepreneurial opportunities around premium digital real estate.

Voice.com sold for $30 million in 2019. Nevertheless, the transaction required months of negotiation and excluded potential higher fractional bids from small investors who might collectively value the asset higher than any single buyer.

Web3 naming systems like ENS are gaining attention partly because they offer native blockchain integration that traditional domains lack. This represents competitive pressure from technically disadvantaged but financially superior alternatives that address liquidity issues by design rather than as an afterthought.

Domain tokenization needs to address the technical challenges that other real-world asset (RWA) categories have successfully solved. The basic framework involves converting domains into tradable NFTs while achieving fractional ownership and instant settlement in compliance with ICANN.

Cross-chain liquidity enables domain transactions to occur across Ethereum, Solana, and other networks based on user preferences rather than technical limitations. DAOs can collectively own premium domains, with governance tokens representing fractional ownership shares and voting rights on development decisions.

The regulatory path for domains appears clearer than for other RWA categories, as domains already represent established digital property recognized by ICANN and international law, with a clearly defined ownership framework.

Early adopters of domain tokenization will also reap disproportionate rewards through network effects that reward platform dominance. The first registrars to implement tokenization correctly will attract premium domains seeking liquidity, thereby drawing traders looking for quality inventory.

The domain industry shows early signs of competitive pressure from blockchain-native alternatives. Web3 naming systems, despite technical limitations, are gaining adoption because they address liquidity issues overlooked by traditional domains.

Investment capital is increasingly flowing towards tokenized assets that offer fractional ownership and DeFi integration. This shift creates opportunity costs for investors considering premium domains that lack similar functionalities.

Traditional domain trading platforms face potential disruption from blockchain-based alternatives that may offer superior user experiences. Once market preferences shift towards liquidity alternatives, the first-mover advantage of domain tokenization may be difficult for existing participants to overcome.

Domain tokenization represents evolution rather than revolution. The infrastructure exists, demand is proven through other RWA categories, and economic incentives clearly favor increased liquidity over ongoing friction.

Companies that embrace this transformation early will establish platform advantages that become difficult to replicate as the market matures. Those that resist will find themselves competing with increasingly outdated value propositions.

Without change, domains will become the only major asset class still trapped in Web2 trading mechanisms. The first registrars to implement tokenization correctly will dominate the next era of digital ownership by providing the liquidity premium that domain owners have sought for decades.

The domain industry built the internet's addressing system. Now, it must join the financial evolution of the internet, or it will be left completely behind.

Author of the opinion: Fred Hsu, Co-founder and CEO of D3.

Related: X launches idle username marketplace, driving the monetization of digital identity

This article is for general informational purposes only and is not intended as legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Original article: “The Domain Industry Faces a Liquidity Crisis: Can Tokenization Unlock Billions in Trapped Value?”

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