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I wanted to see if there was anything we could learn about how these illicit marketplaces work that could be applied to improve the legal marketplaces we invest in at USV. As part of my research, I purchased an item on Evolution no, not drugs — a pair of furry boots in an effort to understand the dynamics of these marketplaces, from trust and safety to flow of funds. This is what I learned in the process. For example, marketplaces with cost structures that command high take rates are vulnerable to Bitcoin-driven business models with very low or non-existent transaction fees. It could be that what drives adoption of unbundled services is competition by lowering costs. Perhaps the answer is to have the best product and user experience. How can you build build network effects while relinquishing control of the data? Do you compete on product and user experience? Is that defensible? Most if not all marketplaces force you to sign up before browsing the listings. The sign up process involves picking a username and password, and an account PIN number. Most sellers particularly drug dealers require all communications to be encrypted with PGP. Most marketplaces have a PGP key field at the profile setup level. Products Lots of drugs. The drugs category is 10x larger than all others. Brand and Reputation Brand and reputation means everything to sellers. Buyers guide themselves via eBay-style reviews of the sellers. This is particularly important in an environment where there is no real identity shared between any of the participants. By contrast, I may not know who an eBay seller is but I take comfort in knowing that eBay does. Some sellers have been involved in over 10, transactions. Many sellers have a presence across multiple deep web marketplaces, and oftentimes point to their profiles on different platforms as a way to further establish credibility. The community moderates sellers beyond the eBay-style reviews. A lot of marketplaces have separate community forums where users review sellers and products. A quick way for new sellers to establish credibility is to get reviewed by these community members. These forums often have established members, to whom sellers frequently send review samples. Sellers oftentimes link to these reviews as social proof, which are often rich in detail about the quality of the product with pictures! Flow of funds You are given a bitcoin public key on to which you must deposit funds before making a purchase. The need for these services in illegal transactions is interesting, since Bitcoin is frequently antagonized for its anonymity. You are expected to trust the marketplace with holding your funds. Some users keep a balance on their account, while others only make a deposit when they intend to make a purchase. Funds show up in your account once the transaction has been confirmed in the blockchain multiple times. Once funds are in your account, checkout is familiar and straightforward. Escrow Escrow is provided by the marketplace operator and it is paramount to their business model. To finance this service and make a profit , marketplaces charge a small fee. Some sellers are very well established and have stellar reputations. This affords them the privilege of skipping escrow. You have some number of days to finalize the order at which point the funds are transferred to the seller or dispute it, at which point the staff gets involved. But I did some reading and wanted to share the most creative emphasis on creative method for anonymously receiving a package: One user put down the address of his local post office as a shipping address instead of his home. Apparently he went to the post office holding the bill, correctly identifying himself as the holder of that federal reserve note, and was given the package which I can only assume contained drugs. Network effects There are no data network effects in the platform. In fact, deep web marketplace operators want to hold on to as little data as possible, as the opposite increases their exposure to prosecution. Brand and product drive defensibility. Because the popular sellers are present in all major marketplaces, users mostly make decisions based on product. When new users ask for recommendations, they are oftentimes sent to a particular marketplace because of its ease of use. This is largely decentralized in deep web marketplaces, as vendors make sure their brand is spread across multiple websites and forums. Marketplaces come and go or get seized by the FBI but sellers need maintain their reputation. Marketplaces can extract value where they incur costs. Because Bitcoin transactions are a commodity, high take rates and complex fee structures are unsustainable business models. The network regulates itself with relatively little involvement from its administrator if networks are like governments, this is similar to a very small libertarian one. Peer to peer commerce, with no intermediary, can work: it depends on the reputation of the supplier and the size of the discount. This brings about a very interesting set of questions for both entrepreneurs and investors. How do you monetize a decentralized network? Is it SAAS on top of the network? We have some ideas, but no definitive answers.

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