Do you realize that the reason the squatter abandoned the domain (instead of keeping it forever) is the $8/year registry fee? My question is why should the squatter pay only $8 per year, and not, say, $50?
As a Glen Weyl-esque solution, make an owner of x domains pay x dollars for each domain they own. This way personal users get cheap domains, and we extract quite a lot of money from squatters.
Collateral damage prevention. A poor-ish hobbyist on the fence about creating a website or not would be discouraged by a higher fee.
Why should they pay $50? What are you charging for above cost of service?
When speculators hold onto domain names without using them, their right to exclude imposes a cost on the other member of society who wishes to use the property productively. So like progressive property taxes in general, a domain tax should be high enough not only to pay for the direct cost of services, but also to discourage idle speculators and encourage owners to use the domain productively.