Miners that receive the transaction and begin working on it create a new BitCoin address for themselves and set miner_payment_address to it. When they solve a block, it is broadcast and the name enters a pending state. It isn't available for purchase anymore but it doesn't resolve to IP addresses either. To complete the purchase the buyer sends the fee to the miners address. Once they do so, each DNS node observes that the BitCoin address in the miner_payment_address field has received 'fee' coins and start serving the name. If insufficient payment is sent within a few days the name becomes available once again. The miner loses but the buyer doesn't get anything either. The pending state ensures that people cannot watch transactions and immediately outbid somebody then try to sell the name back to them at inflated prices.
And this still leaves open the attack for flood the system with domain name registrations with no intention of buying them or using them...just to fill up space or even DDoS the network, due to the payments not being required at the time of registration. I think I might see how the shared work can function, but it still leaves your proposal open to a very simple and easy attack unless the alternative block chain also has it's own currency and registrations
come with a payment.
I don't actually think a BitDNS style system makes any sense. The interest seems to come primarily from wanting to prevent your name being seized by governments. If your website is illegal in a particular jurisdiction (like the USA) then there's a simple solution - use a domain name under a different countries TLD, pick a country where your operation is legal. If your operation is illegal everywhere then you have to use Tor which already provides a secure P2P DNS system, but also anonymity for both service provider and clients.
A BitDNS system only makes sense if you're very concerned about your domain name being seized, but not concerned at all about seizure of your servers, your clients identities or yourself. Maybe I missed something, but I can't think of any operations which actually operate under such a threat model.
Some of us don't believe permission from some random person or government is necessary to register a domain name, nor do we believe anyone has a right to take domain names away from us. I've never (at least knowingly) done anything illegal with a domain name or website, and I don't intend to. I think the real question is why should anyone else be able to stop me from registering a domain name or be able to take it away from me? Why should anyone even be in such a position to do that, even if they never do interfere with me? ICANN is nothing more than government waste, like the central banks.