This shouldn't be a problem, same thing apply for bitcoin scalability.
I haven't used Namecoin, so please correct me if I've misunderstood anything. I'm just looking at Namecoin from the point of view of "do I feel satisfied paying out my bounty?".
Here is my understanding. Please correct any errors:
1. 50 namecoins are generated with every block.
2. The block target time is 10 minutes.
3. Generation difficulty scales the same way as Bitcoin.
8. The renewal cost is 0.01 NC, at least once every 12000 blocks. In practice a figure of twice per 12000 blocks seems realistic, to allow for DNS changes and also for people to renew before the 12000-block deadline to avoid the risk of losing their domain names.
4. The number of namecoins per block doesn't decrease. It's 50 forever.
5. There is no 21-million limit to the number of namecoins generated.
I don't think so, but it should be confirmed by vince (the code seems the same than bitcoin).
6. To reserve a domain costs 0.01 NC, so there is a hard limit of 720000 new names per day, but in practice the limit will be much lower because not all namecoins are used to reserve domains.
It's the same thing for bitcoin. Just a mater of deciding what value will scale well.
7. To activate a domain costs an amount that started at 50 NC but halves every two months. So after about two years, the activation cost (cost of "first update") will be lower than the renewal cost ("name update").
The lower limit is 0.01NC for a first update. Cost of a domain is constantly decreasing (second per second), at the rate of 50% each 8192 blocks (57 days) if i understood the code. Vince says "The network fee decreases 2x every 2 months
" in the FAQ.
I've reproducted the formula of the source code here : http://dot-bit.org/tools/domainCost.php?block=3561
This is to limit the rush on domain names.
9. Some payments are burned, and some are kept by the miner, and some are retained by the spender to represent names. Is that right? What happens to each kind of payment?
All that you pay is lost, except for the fees that go to miners (like bitcoin), and the special 0.01NC that is send to yourself and reserved.
As Vince said, if you want to update sex.bit, it'll cost 0.01NC (lost) + a fee (like bitcoin, miners may refuse your transaction if the fee is too low)
If these points can be confirmed or corrected, I'll have a better feel for namecoin's scalability.
As you promised a bounty for that, you've the right to put some conditions, and explain them. It's up to the implied people to find them reasonable or not. But, for that part, as i'm not the main developper of namecoin, my opinion imply myself only, even if i implied myself a lot in this project.