If you think your registrar is this flakey, transfer your domain registration to someone you trust. This is not "Standard Operating Procedure" and would rapidly destroy any registrar foolish enough to play the extortion game. Legally, you could fight it and get your name back, but that takes cubic dollars. (Sporty's Pilot Shop name recovery from domain squatter before the trademark laws went through)
How do you protect a domain name? Keep your domain name paid up at least two years out into the future. Put a transfer lock on it. Fill in the whois information with valid physical contact information to phones, emails and addresses that you answer to. Keep all this information up-to-date. Develop a real business with a registered trademark/servicemark name and use that for your domain name.
You more or less own your domain name as long as you keep your registration fee paid up to date, unless you decide to try registering one that either is trademark/servicemark by someone else or is considered to be an infringement upon a registered trademark or service mark. An example is Sparc International who decided that SparkFun (a website devoted to electronics experimentation and kits) was infringing upon a high end computing trademark). SparkFun proved that a SPARC system could not be built from the microprocessors and sensors they sell and got a free license partly because the ire it raised made Sparc International look kind of foolish. But then you gotta' defend what you gotta' defend so Sparc had to despite looking pants.
In these instances your lawyers get with their lawyers, establish that you are in no way in competition and then you license the use of your website name with the original trade/service mark owner if they allow it. You may have to pay for the privilege.
Also, in all instances where domain names have been stolen, it has been account security where people have broken into accounts and changed the ownership information. (Lapsed registry fees because you didn't pay don't count, especially if you let it go beyond the grace period)