I'm still trying to get my head around your idea completely.  The main reason that I liked the idea of including BitDNS into the bitcoin block chain via transaction fees is that it gives BitDNS a very comprehensive economic support using bitcoins, thus increasing the value and usefulness of bitcoins.

I gather from Sotoshi's model, both BitDNS coins and bitcoins are generated by the same block, allowing them both to be traded as a commodity.  The problem I see with that is that domain names have value from their name, registration costs, and bandwidth/computer cost , not scarcity in number.

In nanotube's+theymos's proposal, the real cost making a BitDNS is _automatically_ paid by the transaction fee, their is no need to create a second market.  As many or as little domains names will be included in the chain, and the generators will be compensated in bitcoins for providing that service.