Hi!
You won't need to add CNAME records or host your own DNS server if you just add a wildcard A record:
*.mysitename.com. IN A xxx.xxx.xxx.xx
... where xxx.xxx.xxx.xx is your server's IP address.
Once you've done this all you need to do is add your hostname to your server's virtual host file (not sure how this is done exactly in IIS).
So, basically, once a user signs up (e.g. harry), all you need to do is have harry.mysitename.com added as a virtual host in IIS, the DNS will already be pointing to the correct location.