If you’ve been shopping for contraband online for the past five years, you may have noticed that the ability to pay with bitcoin — once the most popular form of payment on dark web markets — is slowly disappearing.
You may be wondering why it matters to you or the average bitcoin enthusiast. (You’re probably an excellent, law-abiding citizen—good for you, but that’s irrelevant.) Let me explain.
The Silk Road
Bitcoin’s first major milestone was its acceptance as a form of money. This happened in the early stages with small, obscure traders, but as word spread, Bitcoin found itself as the dark web’s “official” currency, enabling the creation of a market dubbed the “Silk Road.”
Silk Road was a revolutionary online marketplace. Merchants from around the world could transact from the comfort of their own homes, whenever they wanted, and sell (and customers could buy) whatever they wanted, all with a new form of uncensorable, decentralized, and easy-to-use form of money: Bitcoin .
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Bitcoin adoption depended on markets like Silk Road to pioneer it, and what made Silk Road special was that it was an almost entirely free (as in freedom) market. Free markets are great for adoption because they don’t require bureaucracy, permits, regulations, or any other form of authorization to operate. The fewer permits required, the better a market can function. Hence, there is more adoption, more merchants, and more bitcoin usage.
Without markets like Silk Road, Bitcoin acceptance is at risk and the network is not as efficient as it could be.
The importance of the Silk Road in Bitcoin’s history is undeniably enormous, as it pioneered the use of Bitcoin as a medium of exchange and still remains the largest marketplace for Bitcoin goods and services in history.
Now that you have a good idea of why such markets are so important, I will do my best to explain why bitcoin is no longer used there.
The concept of fungibility and why it matters
According to the Merriam-Webster dictionary, fungible means “to be something (such as money or a commodity) of such a nature that one part or quantity may be substituted for another equal part or quantity to incur a debt settle or settle an account”. This does not apply to Bitcoin.
Each coin has its own history and this history can be taken into account when a user tries to use their coins. This story could also get the user into trouble if they use/hold coins that have been used in a criminal way e.g. B. Drug dealing or a stock market hack.
In Darknet markets, privacy is of the utmost importance. Sellers and buyers want to protect their privacy to ensure their security in transactions. Law enforcement is not too kind to these types of markets and constantly monitors the sites and merchants for privacy leaks.
Bitcoin has weak privacy by default and is therefore not fungible. Data and metadata from the bitcoin time chain can be combined with off-chain data to form solid evidence against an accused in court. There have been cases that have relied on bitcoin’s lack of privacy as conclusive evidence of what the government sees as “misconduct.” Naturally, the dark web markets were looking for solutions.
Should bitcoin developers hard fork privacy or would a soft fork suffice? Should data protection be at the application layer rather than the protocol layer?
The truth is that most people, especially the admins and traders of dark web markets, don’t care. They just want privacy. This is one of the reasons Bitcoin is losing dark web market share to other cryptocurrencies that have already figured it out.
Is a bitcoin always equal to a bitcoin?
contest
Unlike other sectors, there is a lot of competition in the dark web markets, especially when it comes to transaction methods. Markets rise and fall and so do the payment methods used in them.
Prior to 2015, Bitcoin held the largest market share on the dark web markets, followed only by fiat currency.
After the demise of many markets and their providers due to bitcoin’s lack of privacy and poor operational security, bitcoin usage began to decline. Other cryptocurrencies, like Monero, popped up on the dark web markets because they better suited the use case. They had something Bitcoin doesn’t have, privacy by default.
In retrospect, Bitcoin’s focus on being a store of value overlapped with the development of the privacy required to exploit the dark web market.
Improving Bitcoin Privacy
Still, there are many attempts to improve Bitcoin privacy, and I will do my best to list the most prominent ones:
A cup
Custodial tumblers were an early solution to Bitcoin’s lack of privacy. There is usually a central server that collects bitcoin from customers and randomly issues it to separate the customer from the bitcoins being sent.
These have multiple flaws and massive third-party risks, and they are often also honeypots set up by law enforcement agencies to trap dirty bitcoins and monitor users.
There are also problems with services that are not aware of it: this is a long process in which the user mixes their bitcoins with other users’ bitcoins by sending funds to exchanges, online casinos and other websites that have a large Own amount of Bitcoins. This has the same shortcomings as wax mixers.
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CoinJoin
A CoinJoin is a collaborative transaction that combines users’ coins to create a large set of anonymity for them. This increases the privacy of all participants.
This is by far the most effective method for bitcoin privacy and has been used heavily both in and outside of the dark web markets.
This is a very important tool in a bitcoiner’s tech stack and I encourage you to educate yourself about and use it.
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There are also “fake” CoinJoins that use heuristics to confuse on-chain analysis into believing that a transaction performed by only one person is actually an elaborate CoinJoin.
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stealth addresses
Bitcoin stealth addresses, most notably BIP47, introduced a way to have a reusable stealth address that only reveals the user’s real address when a notification transaction was performed.
This creates a new bitcoin address for each user you connect with to ensure privacy. This was never widely used in dark web markets, but it’s a decent technology nonetheless and one of my personal favorites.
Example of a kind of stealth address: PayNym
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, privacy on Lightning is great for senders and partially solves Bitcoin’s on-chain fungibility problem.
Unfortunately, Lightning has privacy flaws when it comes to receiving money. For example, when creating an invoice, the recipient must indicate his “channel point”. A channel point is the UTXO on the blockchain, which is used to support the channel with on-chain bitcoin; This means that the sender can view the recipient’s on-chain transaction history.
Traders, particularly in environments like dark web markets, are looking for simplicity, something Lightning currently lacks.
The above reasons are arguably why Lightning is not currently integrated into any dark web market. There are also concerns about the complications that come with running a Lightning node as a merchant.
However, there is some room for optimism as there are currently teams working to improve both recipient and sender privacy, as well as the user experience issues mentioned above. This could potentially make it much more attractive to dark web markets in the future.
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What can we do to fix this?
I can’t stress enough how important it is that we have adequate privacy on bitcoin for everyone to use. The solution lies in the culture and community of Bitcoin. There are app-level privacy upgrades that can be standardized to improve overall network privacy.
CoinJoins of all kinds, stealth address solutions like silent payments and BIP47, and encouraging users to run their own node and use non-custodial and open-source software where they can.
For transactions, make sure it’s peer-to-peer and not through an exchange or other intermediary. Never use a depot wallet – you can’t protect your privacy if you rely on a third party to take care of it. Also, when acquiring Bitcoin, make sure you are using a non-KYC (Know Your Customer) exchange. Otherwise, your data and privacy could be at risk.
My advice is that you do your own research and make sure you take every precaution when using Bitcoin to ensure your own privacy.
As more people use bitcoin privately, everyone’s privacy will improve, and the more likely it is that bitcoin will once again become the leading currency of the dark web markets, and consequently other markets as well.
This is a guest post by Wildsnow. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
