Good points, but I have to point out that what you're describing is literally what happened with our current system, just less extreme.
I was recently quoted $250,000 to buy a .com that is not being used and as far as I can tell has never been used but some guy bought in the 90s when I was a young child. Aside from the level of extreme is that really different from "You could then probably buy readable domains for exorbitant amounts of cryptocoins."
You touch on what I think the core issue is with domains when you talk about suing Verisign. In some very limited cases, it's possible through litigation to get a domain you feel like you should have. But therein lies the crux of the whole issue: What standard needs to be met before you qualify for a domain name, especially one that is in contention?
In cryptocurrency, the criteria to receive the currency was originally solving problems with computing power because they needed some arbitrary measure. In the world of domain names, it's been a lot of different things but mostly just money and time.
That standard - what "qualifies" you to own a domain over someone else I think would have to be decided before truly effective regulation can be made or enforced, blockchain or not. Right now it's basically temporal, with some carveouts from lawsuits for trademarks.
The current regulations around how domain names work is woefully inadequate (like most regulation around technology) and gives outsized power to private entities. This is something that I think people don't talk about enough when they criticize blockchains.
If there was a better job being done with public policy, you'd likely have less people who think a system where there's no way of imposing real regulation is desirable.
It's especially bad with technology. My go to example is Apple's App Store, but this area is a good topic too.
To me, a happy mix of public/private policy would be best. The government allowing private TLDs, but regulating them. An anti squatting law, price capping new TLD name registrations, an enshrined "specificity system" to claiming an unused (or even used) domain would make the situation so much better, but it'll never happen.