I was wondering, can that clash with a "normal" domain registered as "xn--....."? Apparently there is another specific rule in RFC 5891 saying "The Unicode string MUST NOT contain "--" (two consecutive hyphens) in the third and fourth character positions" [0]
Also, if I was forced to represent Unicode as ASCII, punycode encoding is not the obvious one - it's pretty confusing. But, I don't know much about how and why it was chosen, so I assume there's good reason.
[0] https://datatracker.ietf.org/doc/html/rfc5891#section-4.2.3....