Bitcoins and the Silk Road
An Emerging Online Drug Market
The Silk Road (SR) is an online illegal drug market where pseudonymous buyers and sellers can trade and transfer money via an online currency called Bitcoin. Buyers can also browse vendor pages, and place orders similar to any conventional e-commerce site – somewhat akin to shopping on Amazon. Operational and widely publicized since early 2011, it has been calculated that SR achieved an annual revenue of $22m from 2011-20121.
The Silk Road owes its ideological and historical foundation to the now-obscure cypherpunk movement – a loose affiliation of cryptographic researchers and enthusiasts in the 80s and 90s who were interested in the relationship between cryptography and social and political change, and embraced secure self-regulation. Within this context, the Silk Road is described here as an innovative decentralised marketplace embodying the philosophical foundations of cypherpunk economic reasoning. Cypherpunk technology has begun to make waves in the murky black markets of online trading, but could it influence the mainstream?
‘The state would leech into the veins and arteries of our new societies, gobbling up every relationship expressed or communicated, every web page read, every message sent and every thought googled, and then store this knowledge… But we discovered something. Our one hope against total domination. A hope that with courage, insight and solidarity we could use to resist. A strange property of the physical universe that we live in. The universe believes in encryption. It is easier to encrypt information than it is to decrypt it.’
Julian Assange and co-writers
Cypherpunks: Freedom and the Future of the Internet2
The cypherpunk paradigm can be summarized as replacing centralized systems of interactions, such as those operated by governments, with secure decentralized systems of voluntary interaction regulated by mathematics and economics. The cypherpunks developed many novel ideas and approaches to communication, economics, and politics, with achievements including the development of anonymous email remailers and helping to defeat USA export restrictions on cryptography (key to safe internet commerce outside the USA).
The ideal cypherpunk system is self-enforcing, self-regulating, and cannot be attacked directly by outsiders because they do not know where it is or how to affect it. Such systems ensure that communications are kept private from all third-parties, anonymity is guaranteed and there is no interference from external parties. Social mechanisms like reputation are replaced by formalized systems such as feedback and legal mechanisms like anti-fraud statutes superseded by mechanisms such as escrow or bonds (which can be fortified by cryptographic techniques such as multiple-party signatures). This type of decentralization is key to SR’s success and ability to continue as an illegal online drug market place.
Bitcoin is the online currency underlying SR. The fundamental challenge confronting any electronic currency is coping with the ‘double-spend problem’: when transactions conflict (e.g. spending twice the same unit of currency), which transaction takes priority? Double-spends are difficult to perform with non-electronic money since you cannot give a dollar bill to one person while simultaneously giving it to another, but can be done easily with electronic messages.
Centralization appears in many guises in currency systems: cryptographic pioneer David Chaum’s own electronic currency could guarantee complete anonymity to anyone ‘spending’ a coin, solving the double-spend problem by ensuring that a double-spend leaks enough information such that anonymity evaporates. However, the maths only works with a central ‘bank’ that could be attacked and, due to this centralized point of failure, Chaum’s system never took off.
If we avoid the problems of centralization and attempt to create a decentralized system, we face a different but equally challenging set of problems. Without centralization, in a distributed system in which no party has veto power (and any party can be anonymous or a mask for another party), how and who decides which of two conflicting transactions is the ‘real’ transaction? Must a distributed system simply allow double-spends, and thus be useless as currency? It turns out that the answer is no. The underappreciated genius of Bitcoin is that it considers the valid transaction to be simply the one that had the most computing power invested in producing it.
In the Bitcoin distributed system, there are many ‘good’ parties at work producing new transactions, and they will independently latch onto one of the two competing transactions produced by an attacker and incorporate it into future transactions; the amount of computing power necessary to out-invest those other parties quickly becomes too enormous for any one (potentially fraudulent) entity to invest. Within hours, one transaction will be universal, and the other forgotten. Hence, Bitcoin is an acceptable cypherpunk currency: it is decentralized, parties participate out of self-interest, and it is economically infeasible to attack Bitcoin directly.
The Silk Road as Cyphernomicon’s Black Markets
The design of SR evolved from cypherpunk designs for anonymous email: messages are swapped such that observers cannot tell the sender or destination of a message, and is heavily influenced by Timothy C. May’s 1994 manifesto Cyphernomicon3. The Silk Road is an unregulated black marketplace which is accessed via Tor, a labyrinth of virtual tunnels originally developed by the U.S. Naval Research Laboratory, with the primary purpose of protecting government communications. SR is made up of pseudonymous entities, who communicate privately and securely via public-key cryptography to arrange purchases. It uses an escrow scheme for payment of vendors only on receipt of goods (see below). Buyers publicly rate their vendors who, in turn, are required to post the equivalent of bonds as surety before being allowed to sell their wares.
From an economic point of view, several measures serve to guarantee tight regulation of the market. The SR is paid as a percentage of transactions; hence, it is motivated to encourage as high a turnover as possible, and maintain the satisfaction of both buyers and sellers. Sellers are encouraged not to scam buyers because they will not gain access to their bitcoins in escrow and enough violations will forfeit their deposit held by SR. Buyers have limited incentive to scam sellers because their bitcoins are paid in advance and not held under their control; SR arbitrates disputes and more than a few bad transactions can lead to balances forfeited and blacklisting.
Trust in an Anonymous World
Timothy May3 laid out the necessity of escrow for a marketplace which uses both pseudonymity and untraceable digital cash. On-line clearing suffers from the same danger implicit in all trades: Alice hands over the money, and then Bob verifies that it has cleared into his account but then fails to complete his end of the bargain. If the transaction is truly anonymous, and conducted via electronic cables, then of course Bob just hangs up his modem and the connection is broken. Alternatively, escrow agents that are untraceable but have established a digitally-signed presence and a good reputation for fairness act as mediators and hold payment until the goods are delivered.
Beyond the basic cryptographic and features of the site itself, SR embodies the cypherpunk dream of letting free-market forces operate to inform buyers, enabling them to find sellers with whom they can reach mutually acceptable agreements. For example, the psychedelic LSD is one of the more difficult purchases because there are a bewildering array of options and scammers are unusually common. The SR interface displays a similar review system to most centralized online e-commerce sites, including feedback information, overall reviews and LSD specific reviews. This allows anyone to carry out a simple and quick analysis of each vendor and, as with other online marketplaces, enables an elementary risk/benefit approach to be applied to the drug market, giving increasing power and choice to the previously constrained buyer. Will this lead to further illegal markets taking this more transparent approach?
The End of the Road?
The SR drug market has grown and thrived beyond all expectations, despite an extraordinary – and perhaps unprecedented – level of media coverage and transparency of operation. While SR maintains anonymity, to many users this is not a critical issue as they have little interest in the drugs law enforcement is most concerned with, such as heroin or cocaine. For many, the use of SR has become less about scoring drugs safely and more a statement of principle: they believe that they are capable of researching and evaluating drugs, and their associated risks, thus rejecting government regulation in this area.
SR exposes the scale of illicit drug use, providing a benchmark for understanding what estimates of the global black market really mean: if the Silk Road has turnover of $20m a year and the black market turnover is closer to $100b a year, then the latter is equivalent to 5000 Silk Roads. By its use of public technology (even immature and hard to use technologies) and ordinary postal services, it demonstrates the infeasibility of the long-standing War on Drugs, which has arguably been a greater disaster than Prohibition.
The success of SR took many by surprise (including this author) who had assumed that it would quickly be shut down by law enforcement, fall victim to hackers seeking a lucrative payday, or at best devolve into a lemon market with a few overpriced goods. All three of these possibilities still exist: lengthy SR downtime in November 2012 fueled speculation that law enforcement had finally found a viable attack or that SR was suffering a Denial of Service (DoS) attack. SR’s administrator stated that the downtime was due to ‘a record’ number of users; but if large numbers of legitimate users can accidentally take down the site, clearly a fully-fledged DoS attack is feasible. The real danger may be internal: that the community itself might be skewed towards scammers, and buyers will just give up and buy somewhere else. So far, it appears that the administrators have done a good job of maintaining the balance.
But supposing that SR continues to have an annual turnover of millions of dollars in drugs and other goods? The next development may be ‘information markets’: black markets for leaked data, whistleblowers, corporate espionage, or personal information such as credit card numbers. Existing ‘carding forums’ may be a market niche to usurp, as they have had problems with law enforcement infiltration and could benefit from increased security. Similarly, WikiLeaks has reportedly tried to auction off access to documents in its possession, and while the auctions failed, this may be due to defections and severe internal turmoil as opposed to flaws in the fundamental idea.
Cypherpunk technology appears to have built a sustainable framework for the operation of illegal online markets such as the Silk Road, but can it influence the development of platforms for e-commerce and and trade more broadly? Researchers and digital entrepreneurs may benefit from taking a look back at these forgotten pioneers.
Gwern Branwen is a freelance writer and research assistant at the Singularity Institute, a regular contributor at LessWrong.com, and a hacker and self-experimenter.
 Assange, J., Appelbaum, J., Muller-Maguhn, A. & Zimmermann, J. (2012) Cypherpunks: Freedom and the Future of the Internet. OR Books.
 May, T. C. (1994) The Cyphernomicon: Cypherpunks FAQ and More, Version 0.666. Cypherpunks.to.