The Darknet: The Rise and Fall of the Silk Road

StoriesThe Darknet: The Rise and Fall of the Silk Road

The Hidden Wiki site has keys to the hidden Internet. To access them, you will need a browser with access to Tor services. You can use Tor to view sites that hide your physical location.

But sometimes even this is not enough. The way to the hidden Internet can only be discovered by someone who already knows where to look for.

Sites like the Hidden Wiki publish lists of special site addresses where you can use the Bitcoin currency to buy stolen credit card numbers or drugs, play strange games, or just discuss topics that are too sensitive for the open network.

These lists are quite unreliable, and the addresses contained in them are often outdated.

One link can lead to a large store selling stolen data. The other will lead to a phishing page created solely to steal your money without giving you anything in return.

The hidden Internet, as a result of the debate of technology-obsessed libertarians, emerged in 1990. Those radicals hoped to combine cryptography and the Internet into a single universal solvent that could simultaneously destroy the bonds of government tyranny. The new currencies, which are based on the latest cryptographic technologies, were designed to negate traditional paper money and snatch financial relations from the Federal Reserve System.

And “Mix networks”, where everyone’s identity was hidden by several layers of encryption, were supposed to allow people to communicate, participate in economic life, and not be afraid of being discovered by the government.

the darknet: the rise and fall of the silk road
Bitcoin, the Silk Road currency

Plans to create cryptographic currencies eventually led to the invention of Bitcoin, and the idea of “Mix networks” led to the creation of Tor. These two technologies manifest different aspects of a common dream—a utopian desire for a world in which you can communicate and do business without fear of government intervention.

As in the “pirate republics” of the 18th century, in this virtual underground, vice and freedom merged together.

Law enforcement and copyright authorities prefer to emphasize the dirtiest aspects of Tor use, such as child pornography and the sale of drugs and weapons.

Yet the attempt to create a hidden Internet was driven not so much by ideology as by greed. This network is usually used by drug traffickers and dissidents. And if you live in a country with an authoritarian regime, you can use Tor to get away from state control in the network.

Tor anonymity helps criminals and prevents the state from identifying and detaining them. However, it also has a funny side effect: criminals can’t trust each other because they are not completely sure who they are talking to.

To make money in hidden markets, you need people to trust you. Understanding this point, truly successful entrepreneurs become “confidence brokers”, guarantors of relations between market participants, receiving money for mediation. To do this, entrepreneurs build communities with certain rules, and ensure compliance with these rules. And there are penalties for those who break the rules.

In fact, they create small governments.

the darknet: the rise and fall of the silk road
Charles Tilly

According to sociologist Charles Tilly, modern state power began as a form of “protection” that offered “protected” subjects protection from all others. The same logic is visible today in the hidden Internet, where petty barons and pirate kings fight the state and each other.

Probably, there is no more successful shadow entrepreneur than Ross Ulbricht, who under guise of the “Dread Pirate Roberts” founded the Silk Road—a notorious marketplace for drugs and smuggling. Ulbricht created the Silk Road from scratch, guided by his own interests and political dreams. In the end, this marketplace became a microstate with a high level of bureaucracy, with its own governing bodies, and even with threats of violence against the most stubborn violators of the rules. In an attempt to build a liberty island, Ulbricht recreated Hobbes’s Leviathan. In fact, he became what he was trying to escape from.

the darknet: the rise and fall of the silk road
Ross Ulbricht

But this should not surprise anyone.

In his memoir entitled Men of Dishonor (1993), former Mafioso Antonio Calderone describes the existence of the mafia as a world in which any fact and any statement always have multiple meanings. And criminals must constantly monitor each other’s statements, looking for subtle hints of treachery.

the darknet: the rise and fall of the silk road
Antonio Calderone

There is a similar paranoia in the hidden Internet, where anonymity is literally built into the architecture of social interactions. When Sicilian Mafiosi deal with each other, they at least know each other by sight, and one of them can strike if he thinks he’s been cheated. This fact makes it possible for them to maintain a some sort of peace most of the time.

And in the hidden Internet, people can’t see the real face of the person they want to sell something to, or the person they want to buy something from. This creates problems for everyone. The Game Theory demonstrates that no buyer will enter the market without being able to hold the seller accountable, because the buyer expects to be deceived from the very beginning. In other words, the market itself will not work out in this case.

And potential criminals on the hidden Internet constantly complain that they were deceived. For example, one of the commentators on the Hidden Wiki seriously lamented the fact that he could not find “legal” sellers from whom he could buy stolen credit cards.

All this creates a niche for the market of intermediaries, who can act as such “confidence brokers” and support the relationship between buyers and sellers (who otherwise will not be able to trust each other). Here again, the analogy with the Sicilian mafia arises. Some researchers believe that Mafiosi started out as “confidence brokers” between rural buyers and sellers in the absence of effective legislation. The mafia made money by guaranteeing deals, threatening scammers, and sometimes fueling an atmosphere of general paranoia in order to ensure additional demand for their services. In other words, they built their own informal order, with their own laws, which gradually began to replace the traditional state.

the darknet: the rise and fall of the silk road
Murray Newton Rothbard

When Ulbricht started growing hallucinogenic mushrooms and selling them via the Internet in 2010, he probably didn’t see himself as a Mafioso or a statesman. And his enthusiasm was probably inspired by the libertarian thinker Murray Rothbard.

In his Linkedin profile, Ulbricht stated his intention to “use economic theory as a means to abolish the use of coercion and aggression amongst mankind” and build an “economic model” that would allow people to understand what it is like to live in a world without “the systematic use of force.”

At the same time, he did not mind making a profit from his activities—entries in his diary show that he was happy with the money received for the first harvest of mushrooms, and disappointed that he cashed in the profits before the price of Bitcoin suddenly skyrocketed.

Ulbricht, in his own words, was not a qualified hacker. An early version of the Silk Road website had serious security holes.

In the first iteration of the site, Ulbricht sold drugs to himself, creating the appearance of good customer service. In this way, he gradually created a web of relationships that could grow into a full-fledged marketplace.

the darknet: the rise and fall of the silk road
Ross Ulbricht

As the site got bigger, the level of bureaucracy there also grew. Long before it was launched, Ulbricht had said that he needed some sort of reliability indicator. As soon as he had the opportunity, he implemented an automatic rating system that made it possible for sellers to build a reliable reputation for themselves. Ulbricht also created a forum where visitors could gossip about their experiences with sellers and buyers. Payments were processed using an automatic deposit system, in which the buyer could refuse to pay for the product until it arrived.

Sellers’ nicknames became crude equivalents of commercial brands. As noted by economist David Kreps, a brand backed by an honest reputation has become an asset, and the desire to preserve the value of this asset has become an incentive for further honesty. The brand’s reliability did not depend on the actual owner of the nickname—nicknames could be passed from one person to another without losing their value.

As soon as Ulbricht turned the hidden market into a structured hierarchy, he began to create a police system there. Sellers could be banned for various offenses, for example, for deceiving customers. Game theorists such as Avner Greif and Randall Calvert argued that this was similar to how decentralized medieval trading systems were gradually giving way to more reliable systems based on centralized government authority.

On the Silk Road forum, Ulbricht emphasized the fundamental difference between the Silk Road and the state. The Silk Road, he said, was “regulated by market forces, not by centralized power,” and market competition extends even to him, Ulbricht. He recognized the theoretical possibility that various “public organizations” such as his site could spy on users, send them to prison, and even kill them, which meant that there was almost no difference between the Silk Road and the state. But he insisted that because of market competition, nothing like this would ever happen.

In any case, market competition was no guarantee of integrity. Sometimes merchants wanted to establish a reputation for honesty, just so that one day they could take the money and run away. Some scammers deceived the system by simultaneously conducting a huge number of transactions and requiring customers to complete payment before receiving the goods, and then hiding with the money. And since the scammers used nicknames and used Tor like everyone else, the outraged buyers could do nothing but post curses on the forum.

There was another point. Buyers had to let sellers know their addresses if they wanted to get the drugs they ordered. Under the Silk Road rules, sellers were required to delete this information after the transaction was completed. However, they often broke this rule. At least one of them, Michael Duch, who was a witness at Ulbricht’s trial, kept the names and addresses of his customers in a convenient table form.

This posed a threat to Ulbricht’s business. If one of the sellers leaked the contact details of his customers, the business would be over. So, when a guy named FriendlyChemist threatened to do something like this, Ulbricht didn’t rely on the site’s internal rules or faceless market forces. Instead, he tried to use the last argument of the kings: physical violence. He paid $150,000 to someone he believed was a member of the Hell’s Angels gang to arrange the murder of his blackmailer. And then—another $500,000 for the murder of Friendlychemist’s associates.

Whether someone was killed there or not is unclear. It seems that the whole story was just a scam in which the FriendlyChemist and his alleged killer were accomplices (or they both were the same person). But this event marked the last stage of transformation.

Ulbricht started out as an idealist who wanted to build a market free of what he described as “the bloody hands of the state.” He ended up paying the killer to protect the bureaucratic system that he had created.

When hiring criminals, Ulbricht might have believed that he had no other choice.

As soon as money began to flow into the hidden Internet, greed and “real politics” followed. Initially, Ulbricht saw himself as someone who would bring “order and civility” to the black market, along with others like him who supported libertarian ideals. However, order in real markets is instilled by threats of violence, whether they are legal punishments on behalf of the state or bloody gang wars.

If there is nothing like this, predators come to the market. The Silk Road business model could have worked, but only if truly ruthless people never paid attention to the critical vulnerabilities of its model. As soon as the Silk Road began to attract attention—and earn huge money—its fate was sealed.

the darknet: the rise and fall of the silk road
Ross Ulbricht

It is clear from Ulbricht’s diaries that he gradually ceased to condone criminals who did not share libertarian ideals. He paid hundreds of thousands of dollars to prevent DDоS attacks on his site that harmed business. The fragile web of trust on which the Silk Road was based could collapse at any moment if one of the major sellers published their client lists. In light of all this, it is not surprising that Ulbricht turned to the bandits. He desperately needed protection.

In the context of all these details of the Ulbricht’s history, there is a very typical trend. It should not be surprising that other drug markets on the hidden Internet are subjected to similar pressure and also become miniature states over time with their own industry and police that protects members of the state from external dangers. Like Thomas Hobbes’s sovereign Leviathan, these market-states closely monitor each other through their gun sights.

After Ulbricht’s arrest in October 2013, some members of his old team tried to create a new marketplace—Silk Road 2. When their website was attacked, the new “Dread Pirate Roberts”  took retaliatory measures against the competitor marketplace, whose representatives he considered responsible for that attack. The team hacked competitors’ systems to get lists of their customers’ addresses. Publishing the addresses would destroy their business competitors.

Other smaller markets simply rip off their customers and leave the game. All these small “principalities” are vulnerable to criminals trying to make a profit, and to law enforcement agencies that have already started collecting data on illegal marketplaces for their subsequent destruction.

The libertarian hope that marketplaces could support themselves through free relationships and free choice has turned out to be a chimera with a venomous sting on its tail. Without government regulation, the hidden markets linked by the Tor network turn into anarchy, the main principle of which—”Every man for himself”.

Ulbricht’s carelessness led to the early death of the Silk Road. But even if he had not been so stupid, that marketplace would have still collapsed under its own weight or become part of a larger ruthlessly managed organization. The libertarian dream of a free drug market that would magically regulate itself peacefully has proved just a dream. And playing pirates is fun only when other players are children like you.

But when adults appear with their real goals, you can miss the moment when you have to wake up.

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