Potential cyber-squatting seems like an important issue to consider. If I understand correctly, the proposed system solves it to some degree.
Apparently, the proceeds from a resale are largely captured by the network, not by the holder who puts a name back on auction (is this accurate?) So, the proposed system is sort of like a lease. For example, a name might be worth 500, but if a potential cybersquatter can only personally get 100 from putting it on auction later, then they have much less to gain from squatting in the first place. It's a rather clever system, the effectiveness of which will depend on the parameter choices. A lot of thought and tweaking will probably be needed to choose the best implementation of the basic idea to get the economics right.
Having said that, I think the system as proposed doesn't completely eliminate bad behavior. For example, someone might lock up a name to harm a competitor, celebrity, or wealthy person, and then demand a public or private ransom in order to release the name back onto the market. Unless there are private rights of action like the ability to sue for cybersquatting, how would such behavior be checked under the proposed system? Combining the new auction system with term limits on right of usage might be a good idea. The winning bid could be a per-year lease rate, for example.
The kick-backs are a clever and essential feature, though. They directly reward value-finders and shareholders, and they help facilitate price discovery in a world of costly search and costly information.