Research: How third party intermediation takes place in darknet drug marketplace sales?
Silk Road, as well as its successor cryptomarkets, serve as two sided platforms or marketplaces that function as intermediaries for sales transactions taking place between vendors and buyers. To build trust as an intermediary in exchanges between vendors and buyers trading illicit drugs, darknet marketplaces rely on several strategies including escrow, buyers/vendors ratings, and forums that enable both buyers and vendors to freely discuss various issues related to the products listed on these darknet marketplaces. Let’s take a look at how darknet marketplaces build trust as reliable intermediaries to intervene whenever needed between buyers and sellers trading on their platforms:
Silk Road was the first darknet marketplace to recommend using an escrow system between buyers and vendors. An escrow system ensures that the money (bitcoin) deposited by the buyer is withheld from the vendor and held by the market’s administrators until the buyer confirms that they have successfully received the goods from the seller. The platform’s administrators make money via collecting a commission from the trades successfully completed on the platform.
Basically, escrow systems mitigate sellers’ moral hazard, as a seller cannot abscond with the funds without successfully delivering the goods to the buyer, which is likely to happen when the transaction is illegal. Nevertheless, this also raises the problem of platform’s moral hazard, i.e. the platform’s making away with the funds deposited in escrow (exit scam).
Even though most darknet marketplaces recommend the usage of escrow, it is occasionally not used. In some instances, especially when vendors have received a large number of positive reviews from buyers, trades are completed on a “finalize early” basis, which means that the buyer releases the payment to the seller immediately after placing the order, before the products are shipped.
When using escrow systems, buyers and sellers may be concerned about the platform’s moral hazard, where the platform’s administrators make away with the money via an exit scam. A “multi-signature” escrow system can prevent this from happening, where the funds held in escrow can only be released if two out of three parties (the platform’s administrators, the vendor, and the buyer) agree. Despite the fact that this can minimize both forms of moral hazard (vendor and platform), it has been hardly used, namely due to the high transaction costs associated with its use. Evolution and BlackBank were the only darknet marketplaces to offer a multi-signature escrow system.
A recently published paper analyzed data obtained from Alphabay regarding factors that influence the vendor and buyer use of escrow. The paper focused on the price of products sold, rating of vendors and buyers, and external darknet market scams. Results proved that for vendors, external scams by other darknet marketplaces and the cost of the sold items, negatively affect their decision to use escrow for their sales or not. For buyers, results of the analysis showed that both vendors’ ratings and buyers’ ratings boost the likelihood of escrow being used, as well as the price of sold products being a determinant factor to not use escrow. The outcome proved that buyers and vendors rely on third party mediation under various conditions, and while third party mediation is frequently used, institutional trust is less influential than expected.
Ratings and reputation systems:
Almost all darknet marketplaces have a rating system for sellers, as well as buyers. Ratings and feedback comments are the best means by which a buyer can determine whether a vendor can be trustworthy or not. A recently published study examined the sellers’ ratings on four darknet marketplaces including Silk Road 2.0, Agora, Evolution, and Nucleus. For all drug trades completed on the four marketplaces, 1.2-2.9% of ratings were negative, 1.8-3.7% were neutral, and 94.5-96.9% were positive. The small percentage of negative ratings are important when one considers that these involve illegal transactions on a marketplace where lack of trust is likely to be widespread.
On darknet marketplaces, buyers not only rate the trade, but also provide feedback comments. When the comments provided for negative ratings are investigated, one concludes that these comments serve to reinforce the impression that these marketplaces are functioning well, as very few deals involve poor quality products. The aforementioned study showed that the majority of negative comments are related to shipping problems, rather than poor quality of the product.
An important feature of darknet marketplaces is the existence of multiple forums on the darknet that enable buyers and users of these marketplaces to have active discussions about what actually happens on their platforms, including discussion of vendors who do not offer good products, and those who attempt to scam buyers.