Thriving Through Chaos: Darknet Markets Innovate and Grow

Economists, particularly those at the Federal Reserve and IRS, may disagree on the size of the underground economy, but most would agree it is growing. In the US, the informal or shadow economy of tax-avoiding nannies and carpenters paid under the table is estimated to be $2.5 trillion or 12 percent of annual GDP. In developing countries, underground economies can range as high as 36 to 44 percent according to the United Nations.

People participating in these economies are providing products and services that may not be available through traditional avenues of wage-based employment. Where there is supply and demand, markets will form. But it’s important to note that the underground economy measured in that $2.5 trillion does not include illegal activity such as illicit drug sales, gambling or prostitution. For a great book on their intersection read Eric Schlosser’s “Reefer Madness: Sex, Drugs and Cheap Labor in the American Black Market..”

Would anyone argue that those three publicly-abhorred but privately adored industries would eclipse the trillion mark, if they could be accurately measured? If measured by the same standards, calculated by the velocity of money or examined through the complex layers of participation that make up their economies, would drugs, gambling and prositution exceed the trillion dollar mark? The obvious answer is, yes. Today some of these markets are poised for tremendous growth thanks to a perfect storm of technological innovation and economic necessity.

Darknet Markets Could be Entering a Golden Age
That’s because during times of economic and political turmoil, after natural disasters or wars, the need for alternative ways of making money becomes acute. Underground markets of all kinds thrive. And at no time in our modern history have we faced a financial collapse like the one we’re currently in the midst of — a pandemic that has left millions without jobs and decimated industry sectors such as travel and tourism. Just as traditional underground jobs are growing, so is participation in darknet economies.

In the case of drugs for example, the United Nations Office on Drugs and Crime estimated Americans purchased over $361 billion of illegal drugs in 2003, and that was just one year after the introduction of The Onion Router (TOR), three years before the first online drug sales at The Farmer’s Market, and ten years before the first peer-to-peer anonymous market The Silk Road (2013). Today there are half a dozen functioning markets, and a growing number of private shops that connect anonymous buyers and sellers. While drug sales reign supreme on darknet sites, these markets also sell massive stashes of stolen data, malicious software, tools for fraud and access to compromised networks.

A Growing Ecosystem
One popular darknet site today lists over 20,000 drug listings and serves 3,650 vendors. Many vendors openly advertise their participation on multiple sites. New darknet marketing service companies create turnkey vendor shops complete with cryptocurrency gateways and customer service chats. Popular darknet news sites offer details on the latest arrests, provide links to obscure markets, and rate vendor trust. An ecosystem has formed to help buyers find vendors, and to help vendors more successfully market their products. Trust is being created in one of the most trustless environments one could imagine.

Still trust can be shaken. In September, the largest online marketplace for the last three years, Empire Market, was abruptly shut down and labeled an “exit-scam.” With over 5,000 vendors and over 1 million individual users, it was the most successful darknet market at the time. While unverified, the site administrators were said to have absconded with $30 million in escrowed Bitcoin and Monero. Immediately vendors and buyers migrated to other markets including Deep Sea, Darkmarket, Cannahome and White House Market.

Like Whack-a-Hydra
In the days following Empire Market’s demise, many flocked to a relatively new site called Icarus (whose name should have been a warning). The site added over 1,000 vendors and 10,000 products in the less than 2 weeks before it exited with everyone’s crypto, shaking confidence in underground markets. Law enforcement takedowns of markets and exit-scams have been part and parcel of the digital underground, but these days their impact seems to be less dramatic: buyers and sellers simply move on to other platforms or a growing array of individual vendor shops using the same technology.

And with the broader adoption of Bitcoin and other cryptocurrencies, the impact of a large market shut down appears to have little effect on crypto’s volatility. After the news of the Silk Road shut down, Bitcoin’s value dropped 15 percent overnight. The site had been the world’s first real-world proof of concept for cryptocurrency. But on August 22 this year when Empire Market went down, Bitcoin was valued at $11,651. There were no signs of an immediate impact on price following the news. Less than two months later, Bitcoin stands at $11,357*.

Social Media’s Other Dark Side
There is also growing concern that dark market commerce, particularly the drug trade, is rapidly increasing through social media platforms. While less complex for many users than TOR, learning OPSEC, and understanding Bitcoin, it’s also less safe and easier to be scammed.

The Internet as Mother of Necessity
Economic necessity could drive more people to participate in darknet markets; technology adoption and innovation could make it easier.

More people are now aware of Bitcoin than in 2013 as evidenced by its $200 billion market cap and the growing number of companies that are adding it to their portfolio holdings. Today there are over 7,000 different cryptocurrencies, several with anonymity features greater than Bitcoin’s. There are also over 30,000 exchanges, many of them decentralized.

More importantly, the technology which makes anonymous marketplaces possible is simple and elegant. The same technology that made the Silk Road possible including TOR sites, PGP-encrypted messaging and bitcoin escrow services are still used today.

But markets have innovated. Popular darknet sites include walletless escrow, artificial intelligence to manage disputes, and revolving mirror sites that change every half-hour. New payment gateways are being created for coins other than Bitcoin, and new marketing service companies are forming to recruit more vendors.

Some groups are even openly investing: in 2019, one of the largest Russian marketplaces, Hydra, conducted a token sale (cryptocurrency offering) that raised $147 million in an effort to create a secure, global anonymous market with its own built-in cryptocurrency exchange.

Pandemic Competition
The coronavirus pandemic has already increased competition in the gig economy as more people look for side jobs and gigs due to volatility in the job market. According to the latest and most reliable stats there were 57 million US gig workers in 2018, approximately 36% of the workforce, signalling a “new era of employment.” There are 6 million more gig workers today than there were a decade ago, widening the gap between traditional employer/employee relationships, increasing economic uncertainty and adding to worker vulnerability.

On top of the traditionally employed, many of these gig workers also lost substantial income during this year’s city, state and national shutdowns. While I’m not suggesting every ex-Uber driver will migrate to being an online dealer of drugs or stolen data, the market for side-hustles is getting tighter.

Levée en Masse
We do well to remember that Bitcoin was in part a reaction to government bailouts of banks, as evidenced by Satoshi Nakamoto’s reference on the first block of the Bitcoin blockchain. Now, thanks to the coronavirus, the US has injected over $9 trillion into the pandemic economy, creating from thin air (or trust in the US government) 22% of all US dollars since the introduction of the Federal Reserve.

Economists suggest trillions more are needed in the coming months. When recent news broke that the US President would resume stimulus talks, the price of Bitcoin spiked by $800. In 2020 the U.S. dollar became more abundant (worth less), just as Bitcoin became more scarce (worth more). There will never be more than 21 million bitcoin. When Square, one of the world’s largest payment providers including PayPal, purchased $50 million in Bitcoin last week, their stock increased one percent.

If our economic predicament is worse than during the last recession, the frustration and distrust of government, reserve bank-controlled currencies and manipulation of wider markets are even greater than those we faced in the past. To move forward as a society, we may turn to new innovative systems of trust and alternative payment systems.

For many that are struggling through the current chaos and its devastation to the economy, the gig of the future may just be on encrypted marketplaces using privacy software with cryptocurrency as payment.

*Don’t you wish you’d bought below $12,000.