Understanding the IPv4 Secondary Market

By on 27 Nov 2015

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While allocation of IP addresses by Regional Internet Registries (RIRs) today is generally on a ‘needs’ basis, in the early days of the Internet allocations took place largely on a first come first served basis. No one could have really foreseen that the Internet would expand in the way it has, and that IPv4 addresses would one day become a scarce commodity. However, the fact that there is now a small but robust secondary market in IPv4 addresses shows that IPv4 addresses are most certainly a scarce commodity today, with prices in auction hovering between USD 8 to 12 over the last year.

The growth of the secondary market in IPv4 numbers is a development worth examining in more detail – it fulfils an important need through market-based mechanisms, but it is also useful to query it based on an understanding of historical context and current realities.

IPv4 exhaustion

APNIC was the first RIR to reach its last /8 IPv4 block, back in 2011, and therefore has experience dealing with IPv4 scarcity. To provide a perspective, ARIN reached IPv4 exhaustion four years later, in mid-2015.

APNIC likely reached this point earlier than others because of various factors, including lower delegations in the initial days when delegation policies were more liberal, combined with the rapid growth in Internet use in the Asia-Pacific region.

A large chunk of the next billion Internet users will be from the Asia-Pacific region, and the region is also likely to be home to many of the new Internet services of the future. All of this requires IP number resources, and although IPv6 adoption is picking up, the fact is, for some time to come, there will remain a demand for IPv4 numbers as well.

Responses to IPv4 exhaustion

While one could argue that the scarcity of IPv4 addresses should spur IPv6 adoption, in many cases the decision cannot be taken in isolation. Today, if you want to be reachable by everyone, the fact is  you need to use IPv4, because many users and network resources cannot connect to IPv6-only nodes.

RIRs have taken steps towards addressing this need through mechanisms such as inter-RIR transfer policies. However, the continued rise of IPv4 middlemen demonstrates that there is a market need that is not being fulfilled through the RIR structure. This is not necessarily a bad thing – market mechanisms can often be efficient at allocation and pricing. However, the current unstructured nature of the secondary market risks hiding the true cost of such secondary market transactions, including:

  • Fragmentation: As far back as RFC 2050 in 1996, it has been explicitly recognized that there is a tension between ‘conservation’ (fair distribution of address space according to operational needs, and prevention of stockpiling) and ‘routability’ (distribution of addresses in a hierarchical manner, to ensure scalability of Internet routing). Secondary market transactions of small blocks of IPv4 numbers compromise routability, and can result in fragmentation of the routing table. Such fragmentation causes growth of the routing table, which in turn can impose its own engineering and infrastructure costs as routers, in some cases, may have to be upgraded to cope with a larger routing table.
  • Registration: Some IPv4 resource holders could sublease resources without a formal transfer being reflected in publicly available records. This compromises another of the primary goals of IP address allocation contained in RFC2050, which is ‘registration’ (the provision of a public registry documenting address space allocation and assignment, to ensure uniqueness and provide information for troubleshooting).
  • Needs-based allocation: Secondary market transactions do not take into account the actual IP resource needs of purchasers, which deviates from the general principle of ‘needs’ based allocation followed for IP number resources.
  • Equity: Geographically speaking, the high-growth regions in the world historically received lower allocations in the initial, pre-RIR period. The added cost of procuring IPv4 addresses on the secondary market will likely be passed on to consumers, and though small in absolute terms, could still have an impact on the adoption of Internet use and the deployment of new services.

What role should RIRs play?

The decentralized architecture of the RIRs and the bottom-up nature of policy development, means that global, top-down rules in this respect are not an option.

What is required is a careful analysis of the secondary market in IPv4 numbers from an economic and technical standpoint, to understand if such a market is achieving allocative efficiency, or if scarcity is creating a distorted market.

This analysis must inform the policy development processes at the RIRs, and ensure that existing policies, as well as new ones, create the right incentives and protect against market failures.

 

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The views expressed by the authors of this blog are their own and do not necessarily reflect the views of APNIC. Please note a Code of Conduct applies to this blog.

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