2. Because drugs are illegal, the people running the markets are running a gradually increasing risk of getting caught and jailed. Suppose it's 25% per year. At that point, being a stationary bandit is off the table - if you play honest and try to make a moderate amount every year, you'll probably be jailed by year five. This changes your time preference to the extreme short-term - your goal is to make money as quickly as possible, then get out. That attracts the sort of people who who want to spend a short amount of time selling drugs, then run away with $10 million.
As it happens, one of my projects is estimating that risk by collecting information about lifetimes: http://www.gwern.net/Black-market%20survival
Scott is right that the risk is substantial to running a black-market; while in practice, few people have been busted for running a market (thus far just SR1/SR2/Utopia/Hydra and probably Sheep, out of 70+ markets), this seems to be due in large part because the lifespan of most markets is short and the median is under a year - markets close down before they are found by LE.
Scott is wrong in thinking that the only risk jailing: the risk is (especially for young markets) slightly higher for being hacked and losing all the bitcoins and hence your future commissions (since either you work for free and pay back deposits with incoming commissions, or you are forced to shut down and earn nothing further).
Specifically, I currently estimate the cumulative risk of LE+hackers terminating a black-market at 35% over a time-period of <3 years. This is quite significant and likely a factor in why markets such as Evolution have chosen to exit-scam: if you are turning over hundreds of thousands of USD per month, at some point more is not very helpful since you still have to find a way to cash out safely (an issue as Sheep Marketplace has discovered). And 35% is just the point-estimate - the real risk could be as high as <70% (but also low as <20%). See the graph: https://i.imgur.com/6W68sQF.png
Given this, the question for the big old markets like Agora may not be so much 'why do they exit scam' as 'why didn't they exit scam before?'
Full code:
library(XML)
black <- readHTMLTable("http://www.gwern.net/Black-market%20survival",
colClasses = c("factor", as.Date, as.Date, "logical", "factor", "logical",
"character", "logical", "logical", "logical", "logical",
"logical", "logical", "factor", "logical", "logical",
"integer", "logical", "character"))[[1]]
black[black$Codebase=="",]$Codebase <- "unknown"
black$Start <- as.Date(black$Start); black$End <- as.Date(black$End)
black[is.na(black$End),]$End <- Sys.Date() # assuming the table is up to date
black$Age <- black$End - black$Start
black$Age <- as.integer(black$End - black$Start)
black[black$Closure == "voluntary",]$Closure <- "scam"
# for competing-risks modeling
levels(black$Closure) <- c("alive", "hacked", "raided", "scam", "voluntary") # sets "" to "alive"
library(cmprsk)
blackc <- with(black, cuminc(Age, Closure, cencode="alive"))
cumulativeRisks <- timepoints(blackc, c(365, 365*2, 975)); cumulativeRisks$est
## 365 730 975
## 1 hacked 0.1228233458 0.1228233458 0.1828680140
## 1 raided 0.1074363535 0.1074363535 0.1674810216
## 1 scam 0.6296360751 0.6496509645 0.6496509645
# hack+LE risk at <3 years:
cumulativeRisks$est[,3][1] + cumulativeRisks$est[,3][2]
## 0.3503490355
plot(blackc, col=c(1:4), lty=1, xlab="Days", curvlab=c('hacked','raided','scam'))
for (i in 1:3){
cltype <- names(blackc)[i]
ctm <- blackc[[cltype]]$time
cest <- blackc[[cltype]]$est
cvar <- blackc[[cltype]]$var
clo <- cest ^ exp(-1.96*sqrt(cvar)/(cest*log(cest)))
chi <- cest ^ exp(1.96*sqrt(cvar)/(cest*log(cest)))
lines(ctm[2:length(ctm)], chi[2:length(ctm)], col=i, lty=2, lwd=0.7)
lines(ctm[2:length(ctm)],clo[2:length(ctm)] , col=i, lty=2, lwd=0.7)
}
## https://i.imgur.com/6W68sQF.png
(Note that I have been rethinking my distinction between 'voluntary' and 'exit scam' as market outcomes, since I am increasingly uncertain that any markets other than BMR and TMP actually have returned all funds to buyers/sellers rather than just taking whatever is left either quietly or noisily. So for this analysis, I lump those two outcomes together; just consider the 'exit-scam' label in the graph to be more of a 'other causes' label.)
Excuse my ignorance but whats to stop popular markets from re-releasing their markets under a new name and with new code to throw off LE & Hackers?
I'm no web developer so if its work/time constraints I could understand but it seems like a solution thats possible with the amount of coin some markets bring in.