Innovation and the Black Market Supply Chain

The IoT, mass customization and other technological advances are spurring innovation in large part because they bridge gaps, such as gaps in information in the process of production, gaps between seller and customer, and so on.  While we discuss how innovation is bridging gaps for legal markets in this course, I wanted to focus instead on how innovations in user anonymizing technology, namely Tor and Bitcoin, are bridging gaps in black market supply chains via darknet drug marketplaces such as the (now defunct) Silk Road and Agora (its successor).

Darknet websites like Agora operate on the deep web, which is essentially web content that is not part of the surface web, or the part of the internet indexed by standard search engines. To get through to Darknet websites, users download a special browser called Tor to get to a part of the internet where most URLs are a string of meaningless numbers and letters that end in .onion. Tor acts as a guard against internet surveillance by bouncing communications around a distributed network of relays run by volunteers all around the world, thus preventing anyone from tracking what sites you visit and your geographical location. Like the physical black market, buyer-seller relationships on darknet sites are hidden and, through innovations like Tor and Bitcoin, completely anonymous. 

Unlike the physical black market, however, darknet sites have integrated some of the best practices of regular eCommerce thus improving the consumer’s experience. In this way, consumers wishing to purchase illicit commodities would have an experience similar to purchasing a book on Amazon, through: 

• Clear, easy to read product information: Consumers are able to view information on sourcing, product specs, delivery times, and more.
•  Customer feedback: Users can review sellers and flag scams much more easily. Websites use user feedback on both darknet and Reddit forums to improve sites based on customer trends.
• Globalized Supply: What might have been a very local transaction with limited consumer options and higher prices now reaches across countries and continents, as buyers gain access to a global market for a given illicit product. 
• Easy and (mostly) secure payment systems: In the same way that Tor enables internet anonymity, so Bitcoin enables payment anonymity. Bitcoin is the only payment method accepted by darknet sites, and, although Bitcoin is accepted by more and more legitimate businesses, there’s evidence that darknet sites make up a significant portion of Bitcoin transactions. Per a paper written by CMU’s CyLab, Silk Road at its height accounted for an estimated 4.5% of all Bitcoin transactions within the 29 day period the darknet site was evaluated.   
• Timely delivery of products via UPS or FedEx: This might be surprising, but it’s true. Buyers and sellers mail items to and from proxy addresses using fake names, and the product (more often than not) actually gets to its destination.

These characteristics are screenshot from the Silk Road shows a striking resemblance to Etsy or other seller-based online market place: 

 

Innovation in black markets is nothing new. In the 1980s and ‘90s, the federal government’s crackdown on marijuana drove production underground and, because of the higher risk, led marijuana growers to focus on adding value to their product. The result was innovation in hydroponic marijuana cultivation resulting in much more potent pot. Something similar is happening here, where tight regulation/ prohibition might actually be the biggest driver of innovation as it is forcing sites to become better at ensuring anonymity while ensuring a high level of customer satisfaction.   Although the Silk Road was shut down last year, several copycat sites sprung up in its place. As these sites have jostled to compete, a clear winner, Agora, has emerged to become bigger than Silk Road (with over 16,000 products listed) while maintaining high customer satisfaction. Agora achieved success by blending the best practices of eCommerce (Customer and Supplier Relationship Management) with the lessons learned from Silk Road and the enabling technologies of Tor and Bitcoin payment systems (a strange sort of ERP management).Taken together, these three things help create a marketplace that is both decentralized, anonymous and strikingly effective.  

As the black market has been influenced by innovation in legal markets, this makes me wonder how innovation might go the other direction—from black market to legal markets. How might lessons learned from decentralized, anonymous and restricted markets feed into legal markets to improve customer and/or seller experience? 

References: 

“Drug Market Agora Replaces Silk Road as King of the Dark Net.” Andy Greenburg, Wired Magazine, September 2, 2014. 

“How I Bought Drugs from the Dark Net.” Caroll Cadwallr, The Guardian, October 5, 2013. 

Christin, Nicolas. Travelling the Silk Road: A Measurement Analysis of a Large, Anonymous Online Marketplace.  Carnegie Mellon University INI/CyLab. 2013. Available on the CMU CyLab website here.