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Coase theorem says that shouldn't make a difference.

Coase theorem applies if there are a) zero or sufficiently low transaction costs and b) if parties are able to bargain.

If domains have to be returned back to the registrar b) doesn't apply. Auctions ensure that a) doesn't apply either.

Furthermore, adding a 7 day waiting period before returned domains become available will further ensure that parties cannot trade domains between each other but must purchase from the registrar which makes owning a domain and squatting on it for purposes of selling it pointless.

Right, but both (a) and (b) do apply to the existing system where domain names can be traded. What Coase theorem says is that the resulting allocation will be efficient, regardless of how you do the initial allocation. I.e. it's irrelevant whether people pay squatters to get the domain names they want or ICAAN directly via auctions.

Do you really think transaction costs are low enough?

Buy a domain name, set up a "free this domain name fund" page on the domain, then release it when the funding goal has been met.

People have crowdfunded worse things.

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