> 2) Legitimate domain owners can't recover from key loss

That doesn't seem like an insurmountable obstacle to me. You could devise a scheme where there's the option of a majority of multiple offline backup keys can be used to invalidate and replace the current online key.

Then it's up to the legitimate owner whether the domain is valuable enough to do that kind of key management and backup.

This is a problem of interest to me because I've just started working on a P2P project in Erlang that would benefit a lot from having DNS that isn't as easily squattable. Do you know of any solutions to that, or attempted solutions?