Thoughts On Handshake Top-Level Domain Market Dynamics
Part I: Primary Market Orientation and Introduction to Defensive Acquisitions
Note: This post is by BlockDomains, and was shared to BlockChannel for syndication with permission from its original author.
Once as a youngster playing poker with my dad, I was careless with my cards and literally showed my hand. After he took my chips, he told me that if I kept letting him see what I was holding, he would keep looking. Recently, it has been my impression that many participants are showing their cards in the Handshake top-level domain (TLD) market. It is therefore with sporting intentions that I share some notes from my experiences as an active TLD buyer and seller. Because I plan to keep looking 😉.
The following sections summarize certain observations of the TLD market and the behavior of its participants. These musings are not comprehensive and numerous topics, such as the valuation of specific TLDs and most technical aspects of the protocol, are beyond their scope.
The Handshake TLD market includes primary and secondary components, as summarized below:
Certain TLDs possess disproportionate personal value for certain individuals, a dynamic discussed further under the Primary Market – Introduction to Defensive Acquisitions heading. However, one must assume primarily economic motives in Handshake TLD market analysis, or said differently, that most participants will seek to buy low and sell high.
With that in mind, this commentary aims to provide an orientation to the Handshake primary market and a framework for defensive TLD acquisition tactics. Forthcoming installments will explore offensive acquisition strategies in the primary market (Part II), secondary market dynamics and trends (Part III), and other considerations surrounding portfolio management strategy, such as the primacy of liquidity for active market participants (Part IV).
Primary Market Orientation
In the confusion we stay with each other, happy to be together, speaking without uttering a single word. -Walt Whitman
The Handshake protocol uses a modified Vickrey auction format as its primary market mechanism. A pragmatist’s summary follows:
One nuance of the auction process deserves amplification: although a bidder may enter a bid + blind (collectively, total lockup) more than once during a single auction, each subsequent total lockup requires the allocation of additional $HNS. A bidder’s funds are truly locked up, with the blind being returned at the end of open bidding and the bid approximately 10 days later.
Tension between action and invisibility is inherent in the Handshake auction model. Individuals may participate in the Handshake market without any public disclosure of identity nor any form of human interaction. Each bid, however, represents a small forfeiture of anonymity for the bidder; in greater numbers an individual’s bids might create patterns, which other bidders might perceive and act upon. In a market in which asymmetrical information is monetizable, it would follow that an optimal strategy should seek to minimize one’s own visibility while maximizing actionable inferences drawn from the behavior of others. In light of the potential to increase one’s visibility through greater bidding activity, one can conclude, if somewhat simplistically, that the safest acquisition strategy is to target one TLD at a time. Therefore, for purposes of this discussion, a defensive strategy implies the pursuit of only a single TLD, whereas an offensive strategy would involve pursuit of more than one TLD at the same time.
Primary Market – Introduction to Defensive Acquisitions
“The only defense against the world is a thorough knowledge of it.”
― John Locke
A common axiom in the Handshake community is that, for a TLD that one considers truly important, one should bid once and bid one’s maximum. Although this advice stems from good intentions and applies in certain situations, its applicability has prerequisite conditions, not all of which are consistently present in Handshake TLD auctions. A summary of those conditions relative to the TLD primary market follows:
The statuses above reflect the embryonic nature of the market, as they well should – compared to the traditional domaining sector or a variety of non-fungible token platforms, Handshake TLD transaction volume is small. Coupled with the visibility of total lockups, these dynamics often create frenzied bidding as varied opinions of value, personal importance and price materiality clash. Compared to a more typical Vickrey auction application, such as for broadcast spectrum or mineral extraction rights, Handshake auctions feature greater uncertainty regarding underlying asset value. This combination of factors results in a chaotic primary market rife with pitfalls for newcomers and veterans alike.
Consider a TLD that holds high personal value to a specific participant, but modest or low market value on its own merits. Here, good-faith application of this axiom may prove perilous. In such a scenario, the bidder for whom the TLD holds high value (Bidder A) might bid 1,000 $HNS on a domain that should auction for 100 $HNS based on an objective reading of comparable recent auctions.
In this scenario, the atypical bid of 1,000 $HNS might signal to another participant (Bidder B) that Bidder A places a non-market-based value on the subject domain. If Bidder B is unscrupulous, this presents an obvious extortion opportunity. Under this scenario and in the (likely) event that Bidder A did not allocate enough unencumbered $HNS to counter a bid of 1,001 $HNS or greater, she will lose the auction and be subject to Bidder B’s whims on the secondary market. Plainly, one’s exposure to such an outcome may be mitigated in many cases.
If Bidder A is willing to pay above-market for a certain TLD, she should do so prudently and in a manner that maximizes chances of securing the domain. So then, what is this better way?
Determination of the optimal strategy will depend on myriad factors, but the framework of TLD acquisition reality runs parallel to life: one cannot have everything. Three main priorities govern behavior within this framework, as summarized below:
The old saying of pick two more or less applies. For any participant for whom these priorities are relevant, a difficult set of choices emerges regarding how and when to bid relative to the highest total lockup (high lockup or HLU) and how and whether to respond to counterbids.
The tension between these priorities and proposed resultant bidding strategies that emerge is depicted below:
Bidder A might then be best served by a 200 $HNS bid out of the gate, and in the case of a >200 $HNS total lockup counter, she would retain flexibility to come over the top. Assuming Bidder B were to double Bidder A’s total lockup to establish a new HLU of 400 $HNS, Bidder A would hold sufficient dry powder to volley back a 2x HLU escalation in turn (800 $HNS). At such point, Bidder B’s conviction is likely to dissipate.
In the above scenario, Bidder A allocated, and subsequently locked up, 10x the estimated FMV in order to secure ownership the TLD. Though the scenario is fictional and simplistic, it is intended to reflect the capital resource intensity requisite for a very high-certainty primary market acquisition.
Predicting the bidding interest in a given TLD’s auction with any precision is impossible. However, the following actions may aid bidders to anticipate pricing and prepare for success in auctions:
1. Practice. Any TLD of importance should not be a bidder’s first auction (or tenth). Bid on low-stakes auctions and build up to your intended target price zones/categories of interest.
2. Observe the market. Watch auctions (bid a tiny amount to receive Namebase notifications if desired). Spend time regularly with ShakeStats and the Namebase sold & stats pages. Certain market participants will comment on sales in various chat/social media channels – find and learn from any such commentary.
3. Contextualize. Understand the goals and history of the Handshake protocol. Read relevant publications, watch videos and listen to podcasts and calls. Even if kept private, develop and refine opinions about the market and its trends and trajectory.
4. Record. Find a portfolio and information management approach that optimizes one’s limited time and allows for bid planning and management. Create a framework in which only limited decision-making is required during high-pressure/time-sensitive scenarios.
Given the rapid price appreciation in this market to date, it is not likely that many participants will choose to pursue only one TLD at a time, lest other desired TLDs be unavailable or priced out-of-range in the near future. Therefore, in addition to certainty of acquisition, price efficiency, and preservation of liquidity, a multi-TLD acquisition strategy must also balance another priority: pace.
The forthcoming Part II of this commentary will further consider the role of pace and volume in a primary market acquisition strategy. It will also explore the identification and evaluation of opportunistic bidding situations.
 For purposes of this commentary, “TLD” or “top-level domain” refers to those within the Handshake ecosystem. TLD is a common term in the broader domain name industry (e.g., .com, .org); however, within this commentary the terms refer only to TLDs made available via the Handshake protocol.
 The author’s intentions also include economic self-interest, as he owns numerous TLDs, the value of which may be enhanced through growth in the quantum and sophistication of its market participants. Any connection between this commentary and such growth is, at this time, speculative.
 As a necessary simplification, this commentary sidesteps monetization via second-level domain (SLD) sales. One might determine the value of a TLD based on the present value of future SLD-sale income, adjusted for any costs required to realize such income. Although such a methodology has merits, it would fail to capture certain use cases, and the Handshake SLD currently lacks sufficient volume and data transparency for such analysis to be meaningful, perhaps with the exception of single-character TLDs. As such, it is assumed for this discussion that secondary market TLD sales are generally consistent with their income-generating potential via SLD sales. Gifting and other non-economically motivated behavior is frequently observed in the Handshake market, however acquisitions motivated by the same are generally assumed to conform to broader market forces.
 Handshake primary market auctions use a semi-sealed bid format, in which bidders may obfuscate their true bids through the addition of a blind; the total lockup (bid + blind) is publicly visible. This differs from a standard Vickrey auction format, in which bids are totally sealed, thereby fully concealing each bidder’s intentions. Under a standard Vickrey format, little or no incremental information is available to bidders based on other bidders’ activity. In the Handshake model, though exact bids (and bidder identities) are concealed, the visibility of the total lockup illuminates a perceived pathway to victory: if the highest total lockup is 100 HNS, and another participant bids 101 HNS, absent other bids that latter participant will win the auction. Despite the lack of certainty due to the inability to prevent subsequent bids, this dynamic encourages behavior (such as bid raising) more commonly associated with English auction formats than Vickrey.
 For brevity, this commentary simplifies discussion of the block-based auction processes by referring to the average durations of auction stages in terms of minutes/hours/days. Bidders should note the wildly varying deviations from the average 10 minutes/block and proceed accordingly.
 This axiom is sometimes stated to apply to all TLDs on which one cares to bid. However, its most deleterious effects have concerned TLDs of personal or sentimental importance, particularly as relates to newcomers to Handshake.
 This dynamic also applies in other situations, including those involving TLDs related to one bidder’s specialized areas of knowledge.
 Given the nebulousness and complexity of the TLD market, this framework will not apply to certain circumstances; it is merely the author’s attempt to decipher order from chaos. Of particular note, the point of differentiation between high certainty/high liquidity and high certainty/high price efficiency strategies is based on one’s subjective interpretation of the materiality of blind size.
DISCLAIMER AND DISCLOSURE
This commentary is not intended to be investment advise. Please consult appropriate investment, financial planning, legal and tax professionals regarding any investment decisions. The author, as a hobbyist, has owned, owns, and plans to own in the future numerous TLDs, as well as $HNS; has engaged in numerous transactions to acquire and dispose of the same; and plans to engage in similar transactions in the future.