Non-commercial domains shouldn't have any value to domain squatters if non-commercial use is enforced. Maybe the way to handle this is to have "domain czars" a la Usenet 2. (Their website seems to be broken right now; try Google's cache for a recent copy of the homepage and especially the Usenet 2 rules...)
As for commercial domains, one possibility would be to charge for domain names on a different basis. Perhaps a single domain name would be free. Beyond that, charge exponentially higher annual rates to hold more high-level domains. The first (or second) domain could be a nominal fee ($1.00? $10.00? $0.01?) - each subsequent domain could cost double the last one.
As an example, suppose that one commercial domain is free, and the second is $1/year, the third is $2/year, the fourth is $4/year, etc. To hold 5 domains would cost only $15/year, averaging $3/year. To hold 10 domains would cost $511/year, averaging $51.10/year. To hold 15 domains would cost $16,383/year, averaging $1092.20/year. To hold 20 domains would cost $524,287/year, averaging $26,214.35/year. To hold 25 domains would cost $16,777,215/year, averaging $671,088.60/year.
This would discourage companies from the kind of serious abuse of the DNS we currently see, such as registering separate domains for each product, movie, etc. No flat rate could do this; any rate that a small business can afford will be chump change to a huge multinational corporation. If a company was ever insane enough to hold 25 domains under this scheme, for $16,777,215/year, they would have a strong incentive to release one of those 25 domains to save $8,388,608/year. No matter how big the company is, sooner or later it will get expensive enough that they will need to start conserving domain names. (Obviously, registering through shills (e.g. in the names of employees) would have to be strictly prohibited and grounds for loss of the domain name for this to work.)
This scheme makes the most sense for free-for-all domains like .com is currently. If a new commercial domain is created that is truly appropriate to create many domains, and they're not likely to conflict much, the "domain czar" for that domain might choose to use different rules. Also, domain czars could choose different fee structures as appropriate to the domain in question; some might be free, some might be flat-rate, some might be exponential with more aggressive parameters (e.g. starting at $10/year and multiplying by 5 each time) as necessary to ensure responsible domain usage.
For example, if a .movie domain existed, that domain czar might reasonably allow all movie studios to register names on a first-come, first-served basis for movies actually released by that studio, and reasonable variations, for no charge. Warner Bros. could register the-matrix.movie, thematrix.movie and matrix.movie all for free, but Paramount could not register any of them to deny availability of the domain name. Conflicts could be arbitrated by the domain czar in his best (impartial) judgement.
An obvious question is what to do with collected fees. The obvious answer is that they should be applied first to actual infrastructure costs (e.g. root nameservers), and remaining funds should be used for the benefit of all. How the distribution of such funds is decided is open to question, but good candidates for funding would be donations to the FSF, funding for infrastructure software (e.g. BIND 9), maybe even hardware (a non-profit backbone ISP?), subsidizing low-cost solutions to get new people on the Internet who can't normally afford computers or ISP charges, etc. Things that would benefit the Internet and society as a whole, not commercial investments looking for a return. (If played right, this could be as valuable for the Internet as U.S. government funding through NSF was in the 80's, without using tax dollars for the purpose...)
"Simple things should be simple, and complex things should be possible." - Alan Kay
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