Back in 2023 I experimented with making small loans against web3 wallet addresses/usernames ending in .eth. The theory went that people valued their ethereum-based (ENS) names enough that they wouldn’t want to take the risk of losing them to someone else if they borrowed against them. That was proven wrong. It turns out nobody really cared about their name relative to the value of money, regardless of how little, and 100% of all such loans I made against them defaulted.
Last year I experimented with making loans against .eth names. All of them defaulted as nobody cared about losing them. That was great intel. So next challenge: If you have a website that currently generates revenue every month, I'd be open to making a loan against your real…
— Seán Murray (@financeguy74) July 24, 2024
Since then DNS domain names have become tokenizable and tradeable in the same manner as ENS names, which should reasonably hold more value, and therefore be a better asset as collateral. In 2024 I wrote about how this new technology would likely pave the way for domain name loans in the near future but I’ve since thought more deeply about this after conversing with people on both sides of a possible transaction. On the one hand I’ve said that lenders would have to stick to domain names that were being used actively for businesses to generate a regular base of monthly revenue for a website. That would make the loss of a domain financially painful to a borrower and create an incentive for them to avoid defaulting. Making loans against unused domain names simply because they look good or might have good resale value holds no appeal to me and is not very scalable or liquid.
On the borrower side, however, losing a primary domain name doesn’t sound so terrible because in their words, can’t I just get a new domain that looks a lot like the original and leave you hanging with the old one?
The answer is “yes, yes you can” but in today’s world that might mean losing one’s search rankings, access to social media accounts, access to email addresses associated with the domain, and more. Depending on the nature of the business it could be very disruptive. Unfortunately, once prospective borrowers understand the leverage points a lender thinks it has by collateralizing a domain, borrowers view it as a challenge to beat, whereby the goal becomes how to actually default on purpose and leave the lender stuck with the domain, assuming that was their only security.
Borrowers can accomplish this by having backup domain names in reserve ready to go and by using an email attached to a domain that’s unattached to their website for all purposes including for social media. The loss in something like “organic search rankings” then is an afterthought and all part of the challenge of how to beat the lender. It’s a sobering realization in the context of digital identity that people might not place any value on the digital representation of themselves at all so long as the physical representation of themselves offline is the beneficiary in a financial transaction and would not face recourse. After all, how many times has one encountered a friend or family member or local business saying they got a new phone number or a new email or a new social media account? The loss of their digital identity is an inconvenience, not the end of the world. Now imagine they got a big payout as part of that inconvenience. They’d probably draw up a plan to get inconvenienced as much as possible and say it was just business in the end.
Perhaps lending against domain names would not work as a standalone and would work much better bundled with other protections and security in the case of a default. The transfer of the domain name would at least happen instantaneously while the lender uses its other tools to collect or cure a default.