Why is Bitcoin losing the dark-net markets?
A deep dive into Bitcoin's lose of market-share in dark-net markets.
If you wanted to buy contraband online in the last 5 years or so, you may have noticed that the option to pay in Bitcoin - once the most popular form of payment on the dark-net markets, is slowly disappearing.
You may ask why it matters to you or the average Bitcoin enthusiast - you're presumably an excellent, law abiding citizen - good for you, but it's irrelevant. Allow me to explain:
The Silk Road
The first major milestone of Bitcoin was to be accepted as a form of money, this happened with small obscure merchants at the early stages of Bitcoin, but as the word spread Bitcoin found itself as the "official" currency of the dark-net, and allowed the creation of a market called the “Silk Road”.
Silk Road was a revolutionary online marketplace, merchants from all around the world could transact at the comfort of their own home - whenever they want, and to sell and buy whatever they want, all with a new form of uncensorable, decentralized & easy to use form of money - Bitcoin.
You may still be confused about why this is of any importance to you, I'll try to clarify:
Bitcoin's adoption depended on markets like Silk Road to pioneer it, and what was special about Silk Road is that it was an almost completely free (as in freedom) market - those are excellent for adoption because they don't require bureaucracy, permits, regulations, or any other form of permission to run. The less permission required, the better a market can function, and therefore more adoption, more merchants, and more Bitcoin use.
Without markets like Silk Road, Bitcoin’s adoption is at risk, and is not as efficient as it could be.
The importance of Silk Road in Bitcoin's history is without a doubt massive since it pioneered Bitcoin’s use as a medium-of-exchange, and still remains as the biggest Bitcoin goods & services marketplace.
And now that you have a decent idea on why such markets are so important - I'll do my best to explain why Bitcoin is not used in them anymore.
The concept of fungibility and why it matters
Fungibility - according to Merriam-Webster dictionary: fungible is something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account. This is untrue of Bitcoin.
Each coin has its own set of history, and that history may be accounted for when a user tries to use his coins. That history could also lead to the user getting in trouble when using/holding coins that were used in a criminal manner, for example drug trade or an exchange hack.
In dark-net markets privacy is of high importance. Sellers & buyers want to protect their privacy in order to guarantee their safety when transacting. Law enforcement is not too kind on those type of markets and constantly monitors markets & merchants for privacy leaks.
By default, Bitcoin has weak privacy, and therefore is not fungible. Data & meta-data from the Bitcoin timechain can be linked together with off-chain data to form solid evidence against a defendant in court and outside of it. There have been cases that relied on Bitcoin's lack of privacy as conclusive evidence of what the government sees as “wrong-doing”. Naturally, dark-net markets were looking for solutions:
Should Bitcoin developers add privacy via hard-fork? or should a soft-fork be sufficient? Should the privacy be on the application level rather than on the protocol level?
The truth is that most people, and especially the admins & merchants of dark-net markets, do not care. They just want privacy. That’s one of the reasons Bitcoin is losing dark-net market share to other cryptocurrencies that have figured this out already.
Competition
Unlike other sectors, in the dark-net markets there is a lot of competition, especially when it comes to methods of transacting. Markets rise and fall, and so do the payment methods used in them.
Pre-2015 Bitcoin used to hold most of the marketshare in dark-net markets, followed only by fiat currency.
After the fall of many markets and their vendors because of Bitcoin’s privacy flaws and bad operational security, the use of Bitcoin was starting to drop.
Other cryptocurrencies like Monero starting emerging on dark-net markets because they better fit the use-case. They had something that Bitcoin does not, privacy by default.
In retrospect, Bitcoin’s focus on being a store-of-value overlapped with the development of the required privacy for dark-net market use.
Enhancing Bitcoin’s privacy
Still, there are many attempts at enhancing Bitcoin’s privacy, and I’ll do my best to list the most prominent of them:
Tumblers
Custodial tumblers were an early solution to Bitcoin's lack of privacy. There will usually be a centralized server that gathers Bitcoin from customers and dispenses them randomly to un-link the customer from the Bitcoin he sent.
Those have multiple flaws and massive third-party risks, they are also usually honeypots setup by law enforcement to catch dirty Bitcoin and surveil on users.
There’s also tumbling with services that are not aware of it: This is a long process where the user will send funds to exchanges, online casinos, and other sites that hold a large amount of Bitcoin to mix in their Bitcoin with other users' Bitcoin to un-link the user from his Bitcoin. This has the same flaws as custodial mixers.
CoinJoin
A CoinJoin is a collaborative transaction that combines users' coins is order to create a large anonymity set for them. This increases the privacy of all participants.
This is by far the most effective method for privacy on Bitcoin and has been used heavily on dark-net markets and outside of them.
There are also “fake” CoinJoins whom leverage heuristic to confuse on-chain analysis into believing a transaction made by only 1 person is actually an elaborate CoinJoin.
This one is a very important tool in the tech stack of a Bitcoiner, and I encourage you to learn about it and use it.
Stealth addresses
Bitcoin stealth addresses, prominently BIP47, introduced a way to have a stealth, reusable address that only discloses the real address of the user when a notification transaction was made.
This creates a new Bitcoin address for each user you connect with to ensure privacy. This was never widely used in DNMs, but it’s decent tech nonetheless and a personal favorite of mine.
The Lightning Network
The Lightning Network is a Bitcoin layer-2 with a focus on providing fast, cheap, and arguably private payments with instant settlement. Currently, the privacy on Lightning is great for senders, partially solving Bitcoin’s fungibility issue on-chain.
Unfortunately, Lightning has privacy flaws when it comes to receiving money - for instance the receiver needs to provide his “channel point” when creating an invoice, a channel point is the UTXO on the blockchain that is used to back the channel with on-chain Bitcoin, that means that the sender can view the receiver’s on-chain transaction history.
Merchants, especially in environments such as dark-net markets are looking for simplicity, something that Lightning doesn’t currently provide.
Arguably the reasons above are why Lightning is not currently integrated into any dark-net market. There’s also a concern with the complications that come with running a Lightning node as a merchant.
There is some room for optimism though, there are currently teams that are working on enhancing both the the receiver’s & sender’s privacy, as well as the user-experience issues mentioned above. This could potentially make it much more attractive to dark-net markets in the future.
So what can we do to fix this?
I can not stress enough how important it is that we have decent privacy on Bitcoin that everyone can take advantage of. The solution is within Bitcoin’s culture & community. There are app-level privacy upgrades that can be standardized to improve overall privacy on the network:
CoinJoins of all sorts, stealth address solutions like Silent Payments & BIP47, and encouraging users to run their own node and use non-custodial and open-source software where they can.
When transacting, make sure it’s peer-to-peer and not through an exchange or other intermediary, never use a custodial wallet - you can not ensure your privacy if you count on a third-party to take care of it for you. Also when acquiring Bitcoin, make sure to use a non-KYC exchange - otherwise, your data and privacy could be at risk.
My advice is to do your own research and make sure to take every precaution when using Bitcoin to ensure your own privacy.
The more people that use Bitcoin privately, the better privacy everyone gets and the more likely it is that Bitcoin will emerge again as the prominent currency of the dark-net markets, and consequently of other markets too.
- +wildsnow2D9