Opinion by: Fred Hsu, co-founder and CEO at D3
A small business owner sits on a high-value domain like organic.shop but struggles for months to find a buyer willing to pay the asking price.
Meanwhile, an individual from across the globe swiftly purchases a fraction of a Manhattan apartment through tokenized real estate in under five minutes.
This stark contrast highlights a significant inconsistency in our digital economy. While the real-world asset (RWA) tokenization market rapidly approaches a $400 trillion addressable market, the domain industry remains ensnared in Web2 illiquidity, despite managing 360 million registered domains and a $10 billion premium segment.
If the domain industry fails to embrace tokenization, it risks losing billions in value and ceding market dominance to Web3 naming systems like ENS.
While stocks, real estate, and carbon credits have adopted blockchain-enhanced liquidity, domains are in danger of becoming the internet’s illiquid relics.
The tokenization wave domains are missing
Tokenization has fundamentally changed how valuable assets are traded globally. Tokenized treasuries now amount to over $7 billion, providing immediate liquidity for traditionally slow-moving government securities.
Fractional ownership platforms enable small investors to buy into Manhattan skyscrapers or patent portfolios previously accessible only to large institutions.
Smart contracts remove brokers, escrow services, and the paperwork that typically delay asset transfers. Settlements occur in minutes rather than weeks, with global markets operating around the clock instead of during specific business hours.
The technical capacity to transform domain trading exists now. The question remains: why does an industry founded on digital innovation accept analog friction?
The antiquated domain economy
Selling a domain today feels surprisingly similar to 1999. The average domain sale takes between three to six months, assuming it is completed. Brokers demand commissions of 15%-30%, in stark contrast to the less than 1% for tokenized assets.
Geographic and financial barriers restrict the pool of potential buyers. A talented entrepreneur in Lagos may possess a brilliant vision for developing a premium domain but lacks access to the traditional payment systems or financing arrangements that domain brokers typically require.
As a result of these friction points, less than 1% of registered domains trade annually, representing a colossal economic inefficiency in a market estimated to be worth hundreds of billions of dollars.
The absurdity becomes evident when realizing domains are pure digital assets that should be significantly more liquid than physical real estate or paper securities. Instead, their trading is less efficient than either category.
The innovation penalty grows
This liquidity crisis generates cascading issues that reach far beyond slow sales processes. Premium domains represent substantial trapped value that could ignite innovation if properly liberated through modern financial infrastructure.
Startups cannot use domains as collateral for DeFi loans since traditional banking systems do not recognize digital assets. DeFi protocols struggle to authenticate domain ownership through outdated registrar systems. This financing gap hinders entrepreneurial growth around premium digital real estate.
For instance, Voice.com sold for $30 million in 2019, yet that transaction required months of negotiation and excluded potentially higher fractional bids from smaller investors who might have collectively valued the asset more than any single buyer.
Related: Early Bitcoin domains head to auction
Web3 naming systems like ENS are gaining traction, partly due to their native blockchain integration, which legacy domains lack. This creates competitive pressure from technically inferior yet financially superior alternatives that resolve liquidity issues through design rather than as an afterthought.
Building modern domain infrastructure
Tokenizing domains requires addressing technical challenges that other RWA categories have successfully managed. The foundational framework involves converting domains into tradable NFTs that maintain ICANN compliance while allowing fractional ownership and immediate settlement.
Crosschain liquidity allows for domain trading across Ethereum, Solana, and other networks based on user preferences instead of technical constraints. DAOs could collectively own premium domains with governance tokens reflecting fractional ownership stakes and voting rights over development decisions.
The regulatory landscape appears more straightforward for domains than for other RWA categories, as domains already constitute established digital property with clearly defined ownership frameworks recognized by ICANN and international law.
Early adopters in domain tokenization will capture disproportionate benefits via network effects rewarding platform dominance. The first registrars to effectively implement tokenization will attract premium domains seeking liquidity, in turn attracting traders looking for quality inventory.
Market disruption is already happening
The domain industry is showing initial signs of competitive pressure from blockchain-native alternatives. Web3 naming systems are gaining adoption despite technical constraints since they address liquidity issues that traditional domains overlook.
Investment capital is increasingly directed toward tokenized assets that provide fractional ownership and DeFi integration. This shift results in opportunity costs for investors considering premium domains that lack similar capabilities.
Traditional domain trading platforms might face disruption from blockchain-based alternatives offering enhanced user experiences. The first-mover advantages in domain tokenization could prove challenging for established players to overcome once market preferences shift toward liquid alternatives.
The inevitable transition
Domain tokenization signifies evolution, not revolution. The necessary infrastructure exists, demand is validated through other RWA categories, and the economic incentives clearly favor increased liquidity over ongoing friction.
Companies that adopt this transition early will cultivate platform advantages that become challenging to replicate as the market matures. Those that resist will find themselves competing with increasingly outdated value propositions.
Without change, domains will be the only major asset class still mired in Web2 trading practices. The first registrars to properly implement tokenization will lead the next era of digital ownership by providing the liquidity premium domain owners have sought for decades.
The domain industry built the internet’s addressing system. Now, it must evolve with the internet’s financial landscape before getting left behind.
Opinion by: Fred Hsu, co-founder and CEO at D3.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.