My understanding is that domains do expire unless you pay the fee to renew for another year.

The problem is that this isn't what happens today. If you register a domain and never pay for it again then providers will often renew the domain and keep it to themselves and try resell it later. This is one of the biggest issues in the domain name market and GoDaddy is one of the worst offenders.

Regarding unused domain names, how would anyone know if a particular name is being unused?

Yes that's a good question but I'm sure that ICANN with all it's wisdom and infinite resources and teams could define something reasonable. I believe the first step could be to simply make sure registrars can't do what I describe before.

I accidentally let my personal domain expire because I was using PayPal with my registrar but they couldn’t use that for auto renew. Someone else bought it but they’re not doing anything with it. I can’t see who owns it because they’re doing a private registration with the same registrar I used, so as far as whois is concerned it’s the same registration it’s always had. This happened once before to me years ago and the people who bought it that time put up a fake YouTube clone in French but I just waited them out and they abandoned it a year later. This has been going on two years now and it still hasn’t been abandoned. It’s not critical to have but it’s annoying that someone’s squatting on it hoping I’ll pay a premium to get it back. It’s not that valuable to me.

how would anyone know if a particular name is being unused?

I have a couple of nice domain hacks and I use them for email and random services I run so the root domain appeared to be abandoned. I received so many messages from people wanting to buy them I just started pointing them at other sites so they would stop hassling me. I've had one of these domains for nearly 20 years and it's my main email address. I'm not selling because it would be a year long full time job just to update all my services 😅

I'm not an economics major, but maybe something like a blind auction every year, and if you owned the domain last year, you also have the option of matching the highest bidder to keep the domain.

The biggest flaw with a system like that is that it would still discourage trying to buy an already owned domain, since you could pay for it, but not actually get it if the owner exercises their matching right. But it would definitely discourage domain squatting since the more other people want your domain, the more you have to pay to keep it.

“premium” domains are usually domains that were registered by someone at some point and then the registrar kept it because some of their automated analysis decided your last name is shared by xyz people and the domain could be valuable.

They’re a finite resource and should be limited to a fixed number per human being. And only transferred for free not resold.

While I don't agree with the free transfer I agree with the the other part. ICANN should fine and obliterate registrars that keep domains for themselves and individual hoarders.

Even if they are finite, the number would be so impossibly large that for all practical purposes this would not be the case.

The free transfer would be hard to enforce.

Hey, I'm not the one who typed it... but it's annoying to see when a name you want is taken on all the major tlds because registrars are holding domains in hopes of selling them.