Internet History: Domain Names & Digital Economy

Copyright © 2021
by Aron Meystedt & Andrei Polgar
All rights reserved.
No part of this publication may be reproduced, distributed, or
transmitted in any form or by any means, including photocopying,
recording, or other electronic or mechanical methods, without the
prior written permission of the publisher, except in the case of brief
quotations embodied in critical reviews and certain other
noncommercial uses permitted by copyright law
Topics Covered:
Introduction: The Privilege of Hindsight (4)
The Technology Under the Hood (5)
Introducing the World Wide Web (8)
The Domain Name System (10)
ICANN Begins (14)
First Round of New gTLD Introductions (16)
Sponsored TLD Round (17)
Digital Real Estate as an Asset Class (19)
Domain Names, Blockchain and the Future of the
Digital Economy (28)
Geopolitical Threats, Legislative Developments,
Censorship and Everything In-Between (35)
Conclusions: Making Sense of the Unprecedented (40)
3
The Privilege of Hindsight:
Introduction and Motivation
On March 15, 1985, no one recognized the significance of
Symbolics.com publicly registering the first Internet domain
name. What followed was a revolution both unexpected and
unprecedented, as hundreds of millions of websites followed in
its path. It seems appropriate to use this occasion to explore a bit
about the history of the Internet and domain names (online real
estate), in particular.
Given the privilege of hindsight, it seems clear the Internet will
remain well into the future. In its early days, the Internet was
thought to be a passing fad, even among the well-educated. Nobel
Prize winner Paul Krugman infamously predicted that that the
economic impact of the Internet would most likely be no greater
than that of the fax machine.
This success story was not without its roadblocks. The dot-com
bubble provided generous ammunition. Eye-poppingly high
values were placed on domain names - intangible assets. Bitcoin
and other cryptocurrencies would defy both governmental
regulation and fungibility.
Through all these challenges, the Internet came into its own
during the COVID-19 pandemic. It helped to sustain economic
life, social life, communication, education, and more.
The Internet was no longer unimaginable; the Internet had
become a necessity.
4
One
The Technology Under the Hood
In August 1962, J.C.R. Licklider of MIT proposed a “Galactic
Network,” wherein computers from all over the world might link
up and share data, regardless of physical location. When
Licklider became the first director of DARPA’s Computer
Research Program, he and his team began to consider how the
Galactic Network might be brought into being.
Licklider’s ideas led to ARPANET, the very first version of the
Internet. Even though Licklider left his position a couple of years
prior to the creation of ARPANET, his ideas were foundational,
providing the seed for all that followed.
To understand the massive challenges in today’s world of ultrasmall devices, one must understand that computers at that time
were massive and remarkably expensive. A single computer
could take up a whole room or more, and cost millions of dollars.
They were programmed to complete simple tasks, so the need for
computers to communicate, to network, was obvious.
Although Wide Area Networks (WANs) did exist before 1962,
even in the 1950s, every computer spoke the same “language.”
Licklider’s Galactic Network, and ARPANET, imagined
breaking down barriers in language and location.
By the end of the 1960s, data was sent by means of circuit
switching, over telephone lines. Unfortunately, this was both
limiting and dangerous. Limiting because it was only possible to
send a full pack of data and because data could be sent to only
5
one computer at a time. It was dangerous because it relied on the
stability of telephone systems, subject to mechanical breakdown
and political instability.
Paul Baran envisioned “Packet Switching,” wherein data was
broken into smaller and smaller blocks of data, each of which
was quickly forwarded into several directions. Upon reaching
their destination, the packets were reassembled. ARPANET
embraced his solution.
Baran’s goal was a distributed network, with no possibility of an
entire network being destroyed through the elimination of some
nodes. He envisioned other parts of the network taking over for
missing nodes, allowing for uninterrupted activity and network
survival.
The earliest implementation was facilitated in cooperation
between ARPANET and various universities. On October 29,
1969, a date to remember, computers from multiple locations
established their first packet-switched connections and “spoke”
node-to-node. “LO” was the first message delivered, from UCLA
to Stanford Research Institute (SRI). Intended to read “LOGIN,”
the message was truncated when the system crashed.
Nonetheless, the language barrier had finally been broken.
In December 1969, there were just four nodes: SRI and UCLA,
along with the University of Utah and the University of
California, Santa Barbara. By 1973, growth had become so robust
that connections had even been added between the United
Kingdom and Norway. Milestone achieved.
And with that came more challenges. Non-ARPANET networks
began to pop up, using different data transfer standards. From
that confusion, TCP/IP protocol, a set of common standards,
emerged.
6
ARPANET still was not scalable; it could only communicate
with computers on its own network. The Internet, as we know it,
could not exist under those conditions.
In 1978 Bob Khan and Vint Cerf resolved this by creating the
Transmission Control Protocol and Internet Protocol (TCP/IP),
and by envisioning network interconnectivity through Internet
gateways. Independent networks continued to function as per
usual. But now, gateways would translate and allow separate
networks to connect with one another through the common
TCP/IP.
TCP would take the sender’s data, break it into packets, address
it, and distribute it from router to router. IP would forward these
packets from router to router. Upon arrival at the desired location,
TCP would reassemble the packets back to their original state.
What could be easier?
7
Two
Introducing the World Wide Web
Contrary to popular belief, the World Wide Web and the Internet
are not the same thing. Simply put, the Web is built on top of the
Internet. To all intents and purposes, the Web is still the best
descriptor for the way we use and relate to the Internet.
As discussed in the previous chapter, the Internet experienced a
remarkable growth through the 1970s, a trend that continued into
the 1980s. A concept that was once considered promising but
unscalable became a textbook example of scalability and mass
adoption. But the general public remained largely unaware of the
Internet. No case for its relevancy had yet been made. That would
require the Web, overlaying the functionality of the Internet with
places to visit, what we know as websites.
In 1989, Sir Tim Berners-Lee submitted his initial Web-related
proposal. Along with Robert Calliou, he co-authored the final
version one year later. Their work led to software which became
part of the public domain in 1993. From that time, entities from
all over the world were able to create their own Web pages. One
could easily say that the World Wide Web launched in 1993.
But, according to the Mozilla Foundation, the World Wide Web
came into being in 1991, when its core components were in
place:
• Hypertext Transfer Protocol (HTTP) for data transfer;
• Hypertext Markup Language (HTML) as a publishing
format; and
8
•
Uniform Resource Locators (URLs) associated with each
page.
Regardless of the official birthday, none of the above are
sufficient to encompass everything we do online today. In other
words, there are many things we do on the Internet, but not the
Web, such as:
•
•
•
•
•
Sending email using protocols that are not Web-based,
such as Gmail;
Sending documents through file transfer protocols;
Using various mobile apps;
Sending instant messages using non Web-based protocols;
Sending and receiving cryptocurrencies.
To summarize:
“Internet” is the broadest term. Through the access it provides,
we can use Web-based applications, send emails, and engage in
cryptocurrency transactions.
“Web” is a more specific term that refers to the process of
navigation from one URL to another.
The function and use of the Internet is not restricted to Web
navigation.
9
Three
The Domain Name System (DNS)
an Intuitive and Necessary Solution
It’s difficult to imagine an Internet experience without the
Domain Name System or DNS. Imagine typing in a different (but
much less memorable) string of numbers, such as
“123.45.678.901” to access every website. Needless to say, it
would make for an excruciatingly frustrating experience.
These usability problems appeared even late in the ARPANET
program. By the late 1980s, the network consisted of more than
300 computers. Users had to resort to digital Yellow Pages. But
as the numbers of projects mushroomed, the complexity of IP
addresses grew accordingly. Maintaining these Yellow Pages
became difficult; remembering IP addresses became
unsustainable.
Paul Mockapetris, had been considering these issues even before
he joined ARPANET. In 1983, in conjunction with Zaw-Sing Su
and Jon Postel, he proposed a simple, but radical and intuitive
solution:
•
Start with the name of the project, such as “MyBusiness”
•
End with an extension to describe the purpose or
category. For example, “.com” for commercial uses or
“.org” for organizations.
10
In 1984, these categories were created and called Generic TopLevel Domains (gTLDs). Today’s Internet users are most likely
familiar with these six early options: .com; .net; .org; .edu; .gov;
and .mil.
What was the first one to be publicly registered?
Symbolics.com – of course!
When DNS translates the gTLD such as “Symbolics.com” into an
IP address such as “123.45.678.901” and finds the matching page
for the Internet user:
•
It is no longer necessary to remember increasingly
complex and less-intuitive strings of numbers.
•
There is no need for the Internet user to worry about a
business changing its IP address or Web host. If the user
knows the domain name, the DNS system will go to the
correct website.
•
Businesses are relieved of marketing headaches and
burdens caused by logistical changes.
The DNS solution caught on and became quite popular. Of
course, the next question was about how to obtain a gTLD.
The United States government outsourced this task to Network
Solutions. While gTLDs were initially free of charge, in 1995
Network Solutions began to collect fees for this service. Website
owners were suddenly being billed renewal fees every two years,
at penalty of forfeiting their website and losing control over their
product. Of even more concern to them were the prices being
charged for renewal.
11
Complaints over high prices and lack of price regulation led to
the formation of ICANN, the Internet Corporation for Assigned
Names and Numbers, a non-profit that allowed free-market
competition into the domain name registration process. More
about them later.
Domain registration costs are now far more affordable, even after
factoring in inflation from 1995 until now. Companies such as
GoDaddy have embraced models which revolve around the
commoditization of the domain name registration service, and as
such, a race to the bottom has ensued. This race created the
affordable domain registrations and renewals we enjoy today.
DNS has its share of vulnerabilities. They range from DNS
spoofing (a form of hacking which results in traffic being
diverted to an illegitimate address) to DOS (Denial of Service)
attacks, caused by flooding a certain target with requests in order
to overload the server and make the target in question at least
temporarily unavailable.
A wide range of other challenges and controversies exist,
including some that keep Paul Mockapetris himself up at night.
In fact, a few of his views could be considered game-changing.
Some might assume he is worried about scalability issues, with
hundreds of millions of domain names existing in “old school”
gTLDs, and many more across the sea of new gTLDs that have
been launched. But he is not, since Mockapetris firmly believes
adequate resources are in place to tackle this.
What he is worried about, however, is the issue of illegitimate
Internet actors. So worried, in fact, that he even suggested
switching to a so-called DNS 2.0 framework, which revolves
around transparency and the elimination of bad actors, even if
this comes at the detriment of privacy. In his view, just like spam
12
filters exist to weed out malicious actors, why shouldn’t
something similar be in place for the Domain Name System?
Views surrounding this issue abound and go beyond the scope of
this report. Suffice it to say, it may be smart to not assume that
the current DNS system is set in stone. On the contrary, the future
may well be one involving far less privacy than today, ranging
from mechanisms that make it easier to “ban” certain domains
based on illegitimate activities even to mechanisms which
involve a fully authenticated Internet surfing experience for the
average user.
Dystopian or not, likely or not, views such as Paul Mockapetris’s
make it clear that nothing should be ruled out in terms of DNS
evolution, devolution, or revolution.
13
Four
ICANN Begins
By 1997, the terms “Internet” and “Web” had become synonymous
to most users. Regardless of what people called it, use of the
Internet was becoming integrated into daily life and had become a
key component of both the US and world economies.
Recognizing this impact, the US wished to minimize its role and
encourage worldwide interaction with future growth. ICANN was
incorporated on September 30, 1998 as a nonprofit organization
and charged with encouraging fair and healthy competition in the
distribution and management of DNS names and IP addresses.
Esther Dyson was the Founding Chair and John Postel, formerly
of ARPANET, was appointed Chief Technical Officer.
Today, ICANN is run by a 16-member international board of
directors, carrying out its work through three supporting
organizations:
•
The GNSO (Generic Names Supporting Organization),
responsible for policies pertaining to gTLDs;
•
The ccNSO (Country Code Names Supporting
Organization), responsible for policies pertaining to
ccTLDs (country-code top-level domains such as .de for
Germany, .fr for France, etc.);
•
The ASO (Address Supporting Organization), responsible
for policies pertaining to IP addresses.
14
While ICANN is not without its controversies, it is difficult to
understand the Internet and domain name structures, in their
current forms, without having a good understanding of ICANN.
15
Five
The First Round of New gTLD
Introductions
Earlier we referred to the first general purpose domains
created in the 1980s: .com; .net; .org; .edu; .gov; .mil; and
.int. Despite each of these domain names having been
envisioned for a specific purpose, that purpose was not
enforced for domain names available to the general public
(.com; .net; and .org). Any organization, commercial
interest, or non-profit could use any of the above, and
they did.
During the 1990s, John Postel invited interested
organizations to submit applications for new gTLDs,
which eventually led to the formation of the International
Ad-Hoc Committee (IAHC) to investigate and make
recommendations. Some of IAHC’s recommendations
were implemented, and a few new domain names became
somewhat successful, such as .info and .biz. Others were
ultimately abandoned.
But, the Internet was growing.
16
Six
The 2003 – 2004 Sponsored TLD Round
There are essentially two types of TLDs, distinguished by whom
they are intended to serve. The majority of TLDs are unsponsored
and unrestricted with respect to who may register, and under what
circumstances. Other TLDs are sponsored by and designed to serve
specific or even niche communities, who implement various
limitations.
A good example of a niche community is the legacy TLD .aero,
which was created specifically for air transport professionals.
Therefore, those unaffiliated with the air transport space are not
allowed to registered domain names.
Other examples include .edu (limited to higher education
institutions); .gov (US government institutions, federal and state);
.mil (US military institutions); and .int (worldwide treaty-based
institutions).
ICANN opened its doors to consideration of additional sponsored
TLDs for the period of December 15, 2003 to March 16, 2004. Six
of the 10 applications were approved.
•
.asia, a geo-specific sponsored TLD which serves AsiaPacific entities and individuals;
•
.cat, another geo-specific sponsored TLC serving the
Catalan community;
•
.jobs, a niche TLD serving HR community;
17
•
.mobi, initially sponsored by a wide range of tech
companies such as Google and Microsoft, it became
unsponsored in March 2017;
•
.travel, sponsored for the travel space industry and all it
encompasses (hotel operators, booking facilitators travel
agents, airlines, etc.);
•
.tel, sponsored for individuals and businesses wishing to
publish contact information online.
One may note that .post was initially rejected but approved in
2012.
18
Seven
Digital Real Estate as an Asset Class
Since the earliest days of the Web, there have been individuals
who believe it makes perfect sense for domain names to be
thought of as digital real estate. After all, just like an auto
dealership would naturally prefer a physical location in the best
part of town, shouldn’t an online auto dealership prefer an ultrapremium domain name such as Cars.com rather than an obscure
and less memorable alternative?
Today, it is more than clear that domain names do represent
digital real estate and are here to stay:
•
The right domain name can provide a competitive edge.
With the maturing of the Internet comes greater
competition and greater consequences. Projects need
every opportunity to succeed. Domain names represent
just that. Ceteris paribus (everything else being equal) is
just as relevant to domain names as to economics.
•
For reasons of both scarcity and desirability, domain
names can act as a store of value. Compared to Bitcoin
(save the dimensions of commoditization and fungibility,
actually an advantage), both exist on a distributed
network and both maintain a ledger of ownership.
•
There is an active investor-to-investor market for domain
names. This market makes it possible for domain name
investors to generate liquidity by selling to other investors
19
rather than being required to wait for an end user to
appear.
As clear as it as today that domain names are an asset class unto
themselves, in the early days of the Internet, this was not the
case. This seems impossible because their use is so intuitive
compared to a long string of random numbers, but back then,
tech-savvy users criticized them as unnecessary trinkets that real
Internet users did not need. They believed that domain names
were just a navigation experiment, bound to fail. Or even worse,
a commercialization of Internet culture.
That’s remarkable, considering that some domain names now
worth seven to eight figures were once available for free. Those
who collected domain names at the time were ridiculed for
wasting their time on collecting a worthless commodity. The very
idea was absurd.
Scoffers became believers with the advent of the “dot-com
bubble,” which began in 1997, peaked in 2000, and burst most
decisively in 2002. Many dot-com companies themselves gained
and lost value. A poster child for mismanagement, Pets.com,
once valued at $300 million, sank to zero in less than 300 days.
Fortunes were quickly made and just-as-easily lost; only about
50% of dot-com businesses survived.
Domain names sales data points abound, and they were
impressive, even in millennial dollars. In 2000, some remarkable
prices were posted, prices that were impossible to ignore:
•
AsSeenOnTv.com sold for $5.1 million;
•
Korea.com sold for $5 million;
•
Loans.com for $3 million; and
20
•
In 2001, Hotels.com sold for an even more impressive
$11 million.
The spectacular rise of businesses such as Pets.com made it clear
that the right domain name could be a decisive factor in the
success of an online project, thus legitimizing domain name
investing. Their equally spectacular collapse caused many
investors who lost money to walk away, chastened.
This left a clear field for a new generation of domain name
investors. Speculators like Frank Schilling, Garry Chernoff, Yun
Ye and Kevin Ham quickly realized the great potential of the
domain names that had been abandoned when disenchanted
investors refused to pay renewal fees. By various methods, these
new investors were able to compile lists of the expiring domain
names and manually register them under new ownership. By
various strategies, new portfolios were built that catapulted them
from “domain investors” to just “investors.” As the effects of the
dot-com bubble passed, optimism reigned again.
Meanwhile, Alan Greenspan, the Chair of the Federal Reserve
Bank, aggressively cut interest rates from 5-6% all the way to
1%, unheard of at the time. People were suddenly thinking about
real estate; but, as a rising tide lifts all boats, tech sectors and
domain names as asset classes were positively affected.
Suddenly conferences on domain name investing began to pop
up. The first large conference in 2004, organized by Rick
Schwartz and Howard Neu, called T.R.A.F.F.I.C., in tandem with
conferences and live auctions, made it clear that it was a new day.
Domain name buyouts began. As domain names became more
expensive on the reseller market, those with lower budgets or a
higher risk tolerance became involved in buying out certain
categories of domains until no more were available. The most
popular were permutations of four letters, for any given domain
21
(LLLL.com being the most popular). Also popular were domain
categories such as “large city name” + service domain names
(such as, ChicagoPlumbing.com or DallasRenovation.com).
Eventually blockbuster domain name sales re-emerged. These
ranged from smaller price tags relative to their caliber, such as
$3.3 million for Wine.com and $3.55 million for Shop.com in
2003, until the eight-figure barrier was broken in 2008, when
Fund.com sold for $12 million.
Even as investors were cheering this renewed faith in the domain
name investing ecosystem, trouble was brewing in other sectors
of the economy. The real estate market was the elephant in the
room no one wanted to talk about and too much risk built up in
the system. Credit had been so loosened that people were
speculating recklessly and creating toxic investment products,
such as certain Mortgage-Backed Securities.
The party was over for just about everyone. The financial system,
as we knew it, was ready to collapse.
Mortgage-Backed Securities threatened investment banking, then
traditional banking sectors. Credit Defaults Swaps caused AIG
and other insurance companies to become insolvent. Real estate
prices had collapsed, and with that, most people lost the majority
of their savings. Even the industry giants such as General Motors
were on the brink.
Domain names fared quite well, at least in the first part of the
crisis. But eventually, they would also fall victims to the crisis
and people sought refuge in the safest of bonds.
A number of consequences, good and bad, followed.
•
Domain values were affected at all price levels, taking
two more years to again reach the eight-figure barrier for
a domain sale. In 2010, Sex.com sold for $13 million.
22
•
The LLLL.com buyout failed, as did many others. Again,
many investors refused to continue paying renewal fees.
Domain names gradually became available, and many
remained available, because there were not enough
investors willing to hand-register them. In a generalized
climate of questionable liquidity, few investors were able
to pay even the $10 per year renewal fees for the buyout
portfolios they had built, portfolios which often consisted
of thousands upon thousands of domain names, in certain
cases.
•
Many investors left the domain name ecosystem
completely. As prices dropped, the unluckiest investors
were forced to liquidate their assets, and found
themselves having to sell for pennies on the dollar to an
ever-decreasing pool of interested parties.
However, central banks and governments once again stepped in
and saved the day… or did they?
That is a question that goes beyond the scope of this book.
Suffice it to say that multiple orders of magnitude were required
to jumpstart the economy, including lowering interest rates all the
way to zero in the United States and even into negative territory
in the European Union and Japan. And not even that was
considered satisfactory by markets, with central banks from all
over the world resorting to various forms of monetary easing.
The names differed, from Quantitative Easing in the United
States to other choices elsewhere, but the common denominator
was more than obvious: Providing liquidity was the name of the
game. And, of course, on the government front, companies across
the board were “bailed out” by taxpayers, from brick-and-mortar
giants, such as General Motors, to banks, and even insurance
23
companies such as AIG (entities that should have proven to
exercise the epitome of restraint but were proven to do anything
but).
What does this mean for domain names?
Pretty much the same thing it means for other assets.
Governments and especially central banks had proven that they
were willing to do whatever it took to ensure that asset values did
not collapse, a state of affairs that brings about positive as well as
negative consequences.
In terms of positive consequences:
•
Investors, not just in domain names but other assets as
well, are less worried about liquidity than in the past.
Why? Central banks have made it abundantly clear they
will stop at nothing to protect markets and are willing and
able to act as the liquidity provider of last resort.
•
Asset prices have recovered across the board and have
ventured toward new highs when it comes to blockbuster
sales, with the $30 million sale of Voice.com making it
clear that new frontiers are likely to be explored in terms
of valuation.
•
Even in the “budget” category, there has been remarkable
growth and, in some cases, even manias. For example, the
short-domain mania of late 2015 to early 2016 involved
domains that used to be available at the regular
registration fee, most notably LLLL.com domains after
the previously mentioned post-Great-Recession failed
buyout. Domains went from being available for less than
$10 to fetching over $2,000 each, primarily due to
increased interest from Chinese investors. For the most
part, short domain names were targeted, and the more
24
potential the letter/number combination had in China, the
more valuable they were considered.
However, not everything should be seen through rose-colored
glasses. On the contrary, pointing out negative aspects is also a
must, such as:
•
Liquidity crunch scenarios, despite the unprecedented
efforts of central banks, have not been eliminated
completely. In fact, a valid case could be made that
fighting the business cycle might not be the wisest of
approaches, but again, that goes beyond the scope of this
writeup. Suffice it to say that the pandemic-facilitated
March 2020 liquidity crunch made it clear that asset
prices can still come crashing down. This liquidity crunch
also took its toll on the domain name industry, albeit only
temporarily.
•
There is an increasing gap between Main Street and Wall
Street. Wall Street happily recovered in the post-March
recovery phase, while Main Street struggled. How
sustainable this status quo is remains to be seen. Or, if
you will, the question of whether asset prices can keep
increasing as the real economy tackles the effects of the
2020-2021 economic crisis, with an economic crisis being
much more difficult to keep in check than a financial one
(where liquidity represents a handy quick fix).
All in all, the following observations can be made with respect to
the current state of domain names as an asset class:
•
Gone are the days when the necessity of domain names
was questioned (the pre-dot-com bubble period) as well as
the days when only their potential to represent a serious
asset class was questioned (the period which followed the
bursting of the dot-com bubble).
25
•
Still, every now and then, scenarios involving the
proverbial “death” of domain names tend to pop up, just
as with most industries. From apps representing a domain
killer to decentralized solutions involving blockchain
technology somehow rendering them obsolete, doom-andgloom narratives come and go. Yet, over and over,
domain names prevail as an asset class in terms of both
utility and viability.
•
Even more so, there are occasionally narratives that make
it clear why domain names are vital. For example,
concerns regarding the increasing role social media
corporations play in our day-to-day lives and the fact that,
under certain circumstances, opinions can be censored by
a non-elected entity, raises questions for many.
•
A relevant case can be made that the domain name
industry has matured. From domain conferences, to
auction platforms, to about any imaginable domainoriented service, a robust industry currently exists.
•
However, it must be made clear that in terms of
widespread appeal, the domain investing industry does
not excel. It still represents what one would call a cottage
industry, in stark contrast with the hype generated by the
cryptocurrency space, a topic that will be covered through
the next section.
•
Whether the domain investing industry represents a sector
with high or low barriers to entry depends on how we
choose to define “investment grade domain names.” If we
deploy an ultra-selective domain valuation framework and
choose to focus on only the best-of-the-best domain
names in the .com gTLD (one-word .com domain names,
three letter .com domain names, etc.), acquisition costs
26
can most definitely be considered prohibitive for the
average investor.
If we broaden the definition enough and treat domain names
more like $10 lottery tickets, the barrier to entry can be
considered remarkably low. Realistically speaking, however,
strategies in the spirit of the latter are no longer as viable, in light
of the fact that the domain investment industry is mature enough
for low-hanging fruit to be much harder to come by. Therefore,
focusing on quality is now the name of the game or, at the very
least, erring on the side of quality as opposed to quantity.
27
Eight
Domain Names, Blockchain Technology
and the Future of the Digital Economy
The biggest mistake many observers make is seeing domain
names and cryptocurrencies as arch enemies. Or by assuming
blockchain technology is here to bring about the end of the
Domain Name System as we know it. In reality, the situation
isn’t nearly as dire.
Simply put, domain names and cryptocurrencies complement one
another rather nicely. In fact, together they make a stronger case
for the viability of digital assets than either would in isolation.
Why focus so much on a particular battle if it means losing sight
of the war? What war?
The war over the question of legitimacy of digital assets. We live
in the era of the Internet and so, might be tempted to perceive the
digital world as something that has always existed, in some form.
Yet this mini-book has made it abundantly clear that the Internet
is still in its infancy. The legitimacy of the Internet’s still-young
asset class must compete against options which have been
available since time immemorial, from real estate to precious
metals.
It is through that perspective that domains and blockchain
technology must both be understood. Especially since the
fundamental common denominators are anything-but-difficult to
28
identify, from scarcity to the fact that, in both cases, we are
dealing with assets on a distributed network with a ledger of
ownership.
That having been said, it’s time to put cryptocurrencies under the
(historical) microscope and, of course, we must start with the
Number One game in town: Bitcoin.
It began in September of 2008, when a paper entitled “Bitcoin: A
Peer-to-Peer Electronic Cash System” was published by the
pseudonymous Satoshi Nakamoto, attempting to explain his
vision of a decentralized payment system. The idea of creating
“e-cash” was hardly new, with e-Gold representing a fairlypopular relic of the past. But from e-Gold to various other options
such as Liberty Reserve, the issue was centralization. More
specifically, the fact that there was a centralized point of failure
represented an existential threat. The fact that the two previously
mentioned forms of e-cash ended up being shut down is an
argument that speaks for itself. Bringing down the entity behind
one centralized platform or another means bringing down that
form of e-cash altogether.
But who is in charge of Bitcoin?
Nobody.
And everybody.
“Peer-to-peer” is the operative term, with Bitcoin simply
representing the natural evolution of a concept that is not new.
Peer-to-peer file sharing can be considered a conceptual ancestor
of blockchain technology. Before peer-to-peer networking, a
person uploaded their file to, say, FileSharingWebsite.com and
then provided a download link to the other party, who then
downloaded it from FileSharingWebsite.com.
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Peer-to-peer sharing eliminated that centralized point of failure
(FileSharingWebsite.com) by simply using certain software on a
peer-to-peer basis. Person1 already has the software installed on
his or her computer, as does Person2, and so on. Through this
software, Person1 can download a certain file directly from
Person2, or Person3 without the need for a middleman.
Obviously, this solution is more robust, because in the initial
scenario, everything would break down if a government authority
were to shut down the file sharing website. But in a peer-to-peer
environment, disrupting the flow of information is much more
difficult. The exact same principle is valid with Bitcoin and other
cryptocurrencies.
What is Bitcoin, at the end of the day?
Think of it as an incredibly large ledger that contains linked
batches of transactions known as blocks (blocks - chain of blocks
- blockchain). This ledger which tells us absolutely everything:
How much PersonX sent to PersonY on DateZ, how much
PersonA sent to PersonB on DateC; the list could go on and on.
This ledger is distributed across a very large number of
computers/servers, so an identical copy is found on each of those
machines. That is what we call the Bitcoin network.
What happens if you want to send a certain amount in Bitcoin to
a friend? Oversimplified:
•
•
The sender cryptographically “signs” to prove ownership
of the coins being transferred before the transaction is
recorded in the ledger.
Once that happens, every other node in the network will
automatically know (because, again, a copy of the ledger
is distributed across a large number of computers/servers).
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•
Rinse and repeat for future transactions.
This system enables counterparties that often do not even know
one another to transfer value in a pseudonymous manner. Bitcoin
transactions are, strictly speaking, not private, because each
transaction is permanently stored on the ledger. However, it is
very difficult (but not impossible) to conduct the research it takes
to figure out who is behind each Bitcoin address.
Over time, Bitcoin alternatives (numbering in the four figures)
called altcoins, have been developed. To make a domain name
analogy, think of them as new gTLDs: Many options were
created to satisfy what those behind them believed were a
legitimate need. But just like new gTLDs, there is often not that
much real-world demand for the great majority of solutions that
have appeared. Being selective is the way to go.
To again refer to the domain name space in the context of
cryptocurrencies, the first altcoin to be released was called
NameCoin. Launched in April 2011, its goal was to compete with
the Domain Name System by providing a decentralized
alternative. However, it became clear there wasn’t enough
demand for this solution, nor was it the easiest to implement.
Other altcoins followed suit, from Litecoin (which appeared in
October 2011 and used Scrypt as a hash function instead of
Bitcoin’s SHA-256) to the previously mentioned four-figure
number of Bitcoin alternatives. Unfortunately, the overwhelming
majority of these were nothing but glorified pump-and-dump
schemes based on slightly altered versions of the Bitcoin
whitepaper.
From the beginning, two things became crystal-clear:
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•
•
Blockchain technology cannot and should not solve all of
the world’s problems. Just as there is little real-world use
for questionable new gTLDs such as .horse, it makes little
sense to run a project such as DentaCoin, a
cryptocurrency for dentists.
However, Blockchain technology can solve more than
enough of humanity’s problems for it to exist and remain
relevant, from Bitcoin as a store of value, as a settlement
for larger transactions, to various Decentralized Finance
(DeFi) applications that involve anything from asset
ownership tokenization to insurance services.
It seems clear that domain names and cryptocurrencies should be
understood as partners rather than arch enemies. These partners
serve one goal, to make it possible for the digital economy to
thrive, thereby allowing individuals to control their own
destinies.
The mega-trends involving the digitalization of the economy
have been exacerbated in a post-pandemic framework. Did the
pandemic create these trends? Of course not, it merely made
existing trends more obvious and, in certain instances,
exacerbated them.
Realistically speaking, however, few insiders across a wide range
of industries have doubted the fact that the future is primarily
digital. From “mom and pop” bookstores that had to close due to
competition from larger chains to the large chains themselves that
ended up being bankrupted by Amazon, it’s a progression one
cannot help but notice. Whether you embrace one ideological
position or another is ultimately not all that relevant. What
matters is that the future is digital to a more and more significant
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degree, which inevitably leads to an ever-increasing necessity for
digital solutions to a wide range of problems:
•
Digital real estate, represented by domain names;
•
Digital stores of value, from Bitcoin to a wide range of
stablecoins (cryptocurrencies in one way or another
pegged to currencies such as the US dollar);
•
Digital entertainment, as was made obvious by soaring
Netflix share prices in the context of the pandemic;
•
Work-at-home solutions, as was made obvious by the
share price evolution for companies such as Zoom;
•
The list could go on and on.
Those who position themselves in the digital economy can end up
on a life-defining trajectory:
•
Domain names went from being available at no cost to
fetching amounts up to $30 million, based on publicly
available data.
•
Bitcoin went from not even being able to fetch $0.005 per
coin (a 2009 forum transaction that was refused,
involving a Bitcoin holder who tried to obtain $50 for
10,000 BTC) to mid-five figures per unit.
•
Social media influencers have gone from zero to hero by
appearing on just one social media platform, set up with
nothing or next to nothing by way of a budget.
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•
In terms of “digital construction work,” innovative
website or app-related projects easily find multi-milliondollar financing on Silicon Valley and various
alternatives.
•
And again, the list could go on and on.
The bottom line is this: Internet history is still in the making, with
both domain names and cryptocurrencies representing core pillars
of the digital economy. A digital economy which, in many
respects, has not fully matured, but no matter by which angles we
choose to view the situation, it is difficult to find a more
promising ecosystem than the Internet.
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Nine
Geopolitical Threats, Legislative
Developments, Censorship and
Everything In-Between
As the Internet grew, so did our dependence on it. From 1975
until about 1980, the impact of the Internet was mostly limited to
scientific and military networking, although in some cases,
internal corporate use could be found. By the late 1980s, the
dependence of corporations on the Internet had increased, as had
that of individuals from the business world, who were using it to
network and share information.
As the 1990s unfolded, however, the Internet made its way into
more and more parts of our lives, from increasingly complex
websites and applications to the social networking phenomenon
of the mid-2000s. Closer to the present, more ecosystems are
systemically dependent on the proper functioning of the Internet,
including medical systems and the worldwide financial system.
It would have been impossible for a phenomenon such as the
Internet to continue evolving without major threats also
emerging. Our understanding of the history of the Internet cannot
be complete without a robust review of its most significant
systemic risks:
•
Increasingly complex cyberattacks, which risk
destabilizing key systems that enable the well-functioning
of society, for example, banking systems. Compared to
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other forms of warfare, cyberattacks represent perhaps the
most cost-effective option, which is why they constitute
an appealing solution for rogue states.
•
A potential fragmentation of the Internet, arguably the
number one risk posed to the Domain Name System. In
other words, scenarios involving one country after another
“decoupling” from the Internet and replacing it with an
internal system. As it stands, citizens are on the receiving
end of a censored Internet experience in nations such as
China, with its Great Firewall. Still, bypassing these
mechanisms is hardly impossible and as such, it would be
anything but inconceivable for various geopolitical actors
to demand a game-changer.
•
On the legislative front, threats involve not necessarily the
entire Internet but various sub-sectors. A textbook
example is the European Union’s infamous GDPR, a
mechanism aimed at protecting the privacy of Internet
users, but which has been considered so disruptive by
certain platforms that they simply limited the access of
European Union citizens to various features of their
websites or apps.
•
The legal standing of digital asset ownership represents a
point of vulnerability. For example, ICANN itself has
opened various possibilities to public debate, including
domain/website-specific renewal rates. They have floated
the idea that higher renewal fees should be paid for
domains that are used for high-traffic websites or even for
valuable domain names. Fortunately, such suggestions
have been met with criticism across the board when it
comes to domain names.
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As far as cryptocurrencies are concerned, a valid case could be
made that threats on the legislative front represent a far more
significant issue, considering narratives pertaining to their use for
illicit activities. For the most part, Western political actors have
refrained from an outright ban on cryptocurrencies, but in more
legislatively volatile countries such as China (which has
infamously banned and unbanned cryptocurrencies for years),
that has not been the case.
In terms of our experience as Internet users on social media
platforms, censorship is being more intensely debated. Should
social media players de-platform the most toxic opinion formers,
for example, those who share extremist views or spread fake
news? Who defines toxic, extremist, or fake? Furthermore, what
are the political implications of allowing these decisions to be
made by unelected actors, and to which degree could this pose a
threat to democracy? If so, when does it end?
To remain in the world of social media platforms, how much
influence is too much? For example, we have giants such as
Google that have secured dominant positions when it comes to
everything from online search (Google) to video
creation/distribution (YouTube), content monetization (AdSense)
and operating systems (Android).
It is imperative to understand that the effects of social media at a
societal level are by no means marginal. A textbook example to
that effect is represented by the Cambridge Analytica scandal,
with it becoming abundantly clear that, in certain cases, social
media manipulation can end up influencing election results even
in the most developed of Western nations.
What about the potentially problematic economic effects of the
Internet? Concerns about economic catastrophe stemming from
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job losses caused by technological advances have existed since
the first Industrial Revolution, with the so-called Luddites
protesting aggressively about textile industry job losses.
Fortunately, enough job creation eventually took place in other
sectors to offset the losses in employment in industries such as
textiles and agriculture.
“Creative destruction” is what economists such as Joseph
Schumpeter would call it, and while it has thus far not proven to
be a net-negative in terms of job creation (on the contrary), great
fear remains about whether this trend might be altered in context
of our current industrial revolution and how it will affect lowskilled workers. Debates surrounding inequality are becoming
more and more heated; therefore, it only makes sense to pay
attention to threats presented by such issues and the political
solutions they might bring about.
So, do we have reasons to be net pessimistic about the future of
the Internet? No.
Despite the reality that challenges have emerged, the spirit of the
Internet has survived fundamentally intact. In fact, noteworthy
progress has been made, despite the occasional hiccups.
What we do have are reasons to be optimistic, but to keep our
eyes open. More specifically, to understand that we are living in
unprecedented times. And as such, we have no way of knowing
how things are likely to unfold. Imagine a textbook chart
depicting Gaussian Distribution. Similarly, as far as the Internet
is concerned, most scenarios will be benign.
Tail risks, however, do exist.
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And precisely for that reason, tail risk hedging represents the
smart approach. Essentially, this represents a careful balance
between:
•
Embracing optimism, fundamentally speaking, even
positioning ourselves in a manner conducive to taking
advantage of the various opportunities the Internet offers;
but;
•
Keeping tail risks in mind and understanding that we are
operating in a framework of uncertainty that shouldn’t
keep us from leveraging the game-changing potential of
the Internet, but which should compel us to have
contingency plans in place.
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Ten
Conclusions – Making Sense of the
Unprecedented
Few would have assumed that technology with origins in the
Cold War and the Space Race, the Internet would become
dominant in such a short time. While it’s too early to draw certain
conclusions, many struggle just to keep abreast and make sense
of the unprecedented changes.
How does one even make sense of a college student’s 2003
project (Facebook) becoming so systemically relevant as to
influence presidential elections? Or serve as a tool to organize
mass protest movements? It boggles the mind.
We can and do, however, hope that this report enabled you to
better understand the most dynamic component of our lives
today, the Internet. With a modest and imperfect beginning
(before ICANN, the key functions of the Domain Name System
were handled as an “extra duty,” and by just one person), it plays
a dominant role in our lives today.
What conclusions can we draw from the previous chapters?
These are the conclusions we believe are worth internalizing:
•
The Internet is here to stay. A statement that may very
well seem obvious with the benefit of hindsight but
seemed anything but to some of the world’s brightest
minds.
•
Internet assets are here to stay, from domain names which
represent digital real estate to various cryptocurrencies
that represent anything from digital stores of value
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(Bitcoin and stablecoins) to decentralization facilitators.
Simply put, one cannot have a digital economy without
digital assets and digital infrastructure. As such, it would
be nothing short of illogical to question the staying power
of domain names, cryptocurrencies, and a wide range of
other digital assets.
•
Freedom represents one of the core pillars of the Internet,
and many Internet assets are just that, freedom facilitators.
Taking control over your online destiny by owning a
domain name and taking control over your finances by
leveraging everything cryptocurrencies have to offer can
be an asset in our modern world.
•
The Internet did not have a perfect beginning. It has been
used for evil as well as for good. Illegitimate use cases
prevailed when cryptocurrency space was in its infancy.
Yet as time passed, illegitimate use cases became a less
dominant variable and human ingenuity enabled sector
after sector to flourish.
•
From the less than efficient introduction of new gTLDs
relating to domain names to the various altcoins with little
or nothing in the way of use cases that still exist,
expecting perfection in the context of the unprecedented
would, after all, make little sense.
•
Internet assets should not be perceived as entities
competing against one another for survival. On the
contrary, the survival of one Internet asset class, such as
domain names, increases the likelihood that other asset
classes, such as cryptocurrencies, will thrive. The name of
the game is understanding that robust digital assets
represent the core pillar of the digital economy, and as
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such, the word “complementary” must be deeply
engrained in our subconscious.
•
As explained in the previous chapter, we should never
make the mistake of taking the Internet for granted. Or
ignoring the various tail risks that inevitably pop up, from
tail risks relating to malicious actors (cyberattacks); to tail
risks on the legislative front (including those pertaining to
the legal standing of Internet asset owners); and even
geopolitical tail risks which threaten the very integrity of
the Internet as we know it (the fragmentation of the
Internet, for example). Should we allow these risks to
keep us from exploring the true potential of various online
sectors? Of course not. They should simply remind us that
keeping our proverbial ear to the ground is a must.
All in all, we have the unique privilege of witnessing Internet
history in the making, with the many downright generationdefining opportunities this brings about. The rise of the Internet,
in other words. And with it, the rise of online real estate as well
as the digital economy.
Not exploring everything our online existence has to offer would
be a grave mistake, as would underestimating the effects it will
have on anything from employment to personal finance. In some
circles, the idea of having more and more exposure to Internet
assets is becoming increasingly popular. In others, it is but a seed
in the process of germinating. If there is just one message the
authors of this book wish to share, it is this: Explore everything
the Internet has to offer, be generous with respect to acquiring
more and more Internet assets, but also be aware that with
amazing opportunities comes even greater volatility!
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