Yep, this is some kind of weird _feature_ in it. You can pay $5 to get "stealth" domains that others cannot register sub domains of.
It seems that from the start the point was to share novelty domains, i.e. letting other people make subdomains off your domain is the point, and the rest of it kind of grew out from there.
I've put a couple domains on there expressly for that purpose... they also support dyndns options which makes it nice for home server networks.
I do wish that Let's Encrypt would work with them to whitelist all the domains on freedns.
I can highly recommend them.
josh the webmaster at freedns is a really great guy. and they are very much into the golden rule philosophy. note also that it is trivial to change subdomains, and you can make your parent domain public, or private.