DNMs in 'The Economist'

"Shedding light on the dark web: The drug trade is moving from the street to online cryptomarkets. Forced to compete on price and quality, sellers are upping their game":

Though online markets still account for a small share of illicit drug sales, they are growing fast--and changing drug-dealing as they grow. Sellers are competing on price and quality, and seeking to build reputable brands. Turnover has risen from an estimated $15m-17m in 2012 to $150m-180m in 2015. And the share of American drug-takers who have got high with the help of a website jumped from 8% in 2014 to 15% this year, according to the Global Drug Survey, an online study.

...Despite the elaborate precautions, until now cryptomarkets have tended not to last long. The first, Silk Road, survived almost three years until the FBI tracked down its administrator, Ross Ulbricht, aka "Dread Pirate Roberts". He is serving a life sentence for money-laundering, computer-hacking and conspiracy to sell narcotics. Its successor, Silk Road 2, lasted just a year before law-enforcement caught up with it. Buyers and sellers migrated to the next-biggest sites, Evolution and Agora. The former vanished in March 2015 with $12m-worth of customers' bitcoin in an "exit scam". Then Agora disappeared, claiming that it had to fix security flaws. The biggest still standing is Alphabay, though the recently opened fourth version of Silk Road could knock it off the top spot.

...The Economist has extracted data from the resulting 1.5 terabytes of information for around 360,000 sales between December 2013 and July 2015 on Agora, Evolution and Silk Road 2. In total the deals were worth around $50m. For each transaction we know what was sold, the price in bitcoin, the date of completion, shipping details, the customer's rating and the vendor's pseudonym.

MDMA (ecstasy) sold the most by value (see graphic). Marijuana was the most popular product, with around 38,000 sales. Legal drugs such as oxycodone and diazepam (Valium) were also popular. A third of sales did not belong in any of our categories: these included drug kit such as bongs, and drugs described in ways that buyers presumably understood, but we did not (Barney's Farm; Pink Panther; Gorilla Glue). Some of the products cater to niche interests. You can consume "with a good conscious [sic]", promises one vendor for his "ethically sourced" THC chocolate, which costs 13% more than the ordinary, immoral stuff. "Conflict-free" cocaine is also available for the humanitarian (or delusional) drug-taker. And "social" coke--a less pure version sold at a discount of 5-25%--is aimed at buyers who want to look lavish on a budget.

The first striking finding is that drugs bought on the dark web are comparatively pricey (see chart 1). Even though buyers can browse for a bargain, in most countries a gram of heroin costs roughly twice as much online as on the street. The markup for cocaine is around 40%...Australia bucks this trend. Narcotics prices there are usually three or four times higher than the rich-world average. Australia is so remote that sending drugs there is much more expensive, plus their customs officials are better at securing their border, notes David Décary-Hétu, a cyber-security expert at Montreal University. But the competition from an international market drives online prices below those on the street. Using the postal system makes arbitrage possible, says Nicolas Christin of Carnegie Mellon University. An enterprising dealer could, for instance, pick up a gram of heroin from the Netherlands for $75. If it makes it through customs into Australia, the price jumps to $288. One reason for the higher price of dark-web drugs in most of the world, says Mr Christin, is that vendors must build in some of the cost of parcels being intercepted (some promise to split the loss with the seller; others say they will abide by a moderator's decision). And using the postal system makes it hard to introduce economies of scale. To avoid suspicion, vendors do not buy vacuum-seal bags in bulk. A package can take an hour to prepare. The common precaution of using a distant post office is costly: on an online forum, one dealer complains that dispatching a single package a day would mean losing money on petrol alone. Postage and packing raises prices as much as 28% (see chart 2). The main reason for the online price premium, though, appears to be that dark-web drugs are of higher quality. If you order from someone with thousands of reviews you are unlikely to get a poison in place of a psychedelic, explains a regular buyer of LSD. An online dealer who flogs dross gets bad reviews and loses clients. A study by Energy Control, a Spanish think-tank that asked volunteers to send samples of dark-web drugs for testing, confirms the existence of this quality premium. It found an average purity level for cocaine, the drug for which it gathered the most data, of 71.6%, compared with 48% for cocaine bought on Spanish streets. Over half of the dark-web samples contained nothing but cocaine, compared with just 14% of those bought offline. Taking purity into account, it is probably cheaper to score online than via your local dealer, says Judith Aldridge of Manchester University.

...Mr Christin and Kyle Soska, another cyber-security expert, found that the share of vendors using PGP encryption jumped from about 25% in July 2013 to over 90% in January 2015.

...Around three-fifths of dark-web vendors are groups of people rather than individuals, judging by the share of profiles that refer to themselves as "we". And a small number are responsible for most of the sales. The study by Mr Christin and Mr Soska found that just 2% of sellers made more than $100,000 between July 2013 and January 2015. Another study, by Mr Décary-Hétu and Ms Aldridge, suggests that roughly a quarter of deals on dark-web markets appear to be for wholesale purposes. Purchases of cannabis costing over $1,000 (roughly three ounces) make up 24% of marijuana sales by value. Ecstasy orders worth the same amount make up 47%. Other sellers are probably users who have bought a bit more than they need and have no one to sell to. They find buyers online, drop their surplus in the post and leave it at that.

We crunched numbers for around 2,000 vendors, splitting them into quintiles and analysing their characteristics. Those who did well look a lot like the best sellers on legitimate marketplaces such as Amazon and eBay. The sellers with the highest revenues tend to offer a wider range of products and to ship globally. They seek to distinguish their brands by developing a reputation for quality, reliability and speed. They get the best reviews. Since little other information about the seller is available, a good track record matters even more in illicit markets than in ordinary ones. Most of the ratings in our dataset are close to five, but there is still a gap between the best and the rest. The big fish were awarded scores of 4.9 on average, compared with 4.7 for the minnows. Breaking into such a market can be tough. So newcomers use promotions such as free samples to win their first reviews. Low prices help, says one vendor: once you have a following you can raise them. Some use stunts: one outfit somehow convinced a customer to get its logo tattooed on his back. The photo, circulated on forums, helped attract new buyers.

...Diversifying is another way to increase revenue. Vendors split into two distinct groups: those who peddle drugs and those who do not (see chart 3). Within those categories, bigger vendors typically stock at least two products; smaller vendors often sell just one. And when drug dealers decide to branch out, what they add depends somewhat on what they already peddle. Those who sell speed, for instance, are more likely also to stock MDMA, another synthetic drug. Those who sell cocaine are likely to diversify into heroin; and those who sell marijuana not to diversify at all. Just as on the "surface" web, going global can be profitable. About half the dealers in the upper bracket of sales ship worldwide, compared with a third at the bottom end. But this is riskier: customs officers are more likely to inspect suspicious packages than postal workers are. Australian officials seem to be the nosiest: of the 126 dealers in our dataset who name regions where they will not ship, 112 exclude Australia.

See also:


Comments


[15 Points] None:

...The Economist has extracted data from the resulting 1.5 terabytes of information for around 360,000 sales between December 2013 and July 2015 on Agora, Evolution and Silk Road 2.

Thanks /u/gwern


[10 Points] None:

[deleted]


[7 Points] None:

[deleted]


[4 Points] bn604:

Good article, /u/Theeconomist1

:P


[3 Points] WeedAndLsd:

Really great piece, very cool read. I wonder what made them talk about the "new" silk road, comparing it to Alphabay? The Economist confirmed market shills :P


[2 Points] EfficientBanana:

Why are blotter and tabs separate circles branching off of lsd? They're the same thing. And aren't xanax and alprazolam the same thing too?


[1 Points] Panic_throwaway1:

I'd get a vendor's logo tattooed for the right price.

Probably like a month's supply for my back or somewhere that can't be seen and a year's supply for my face or arms or something.


[1 Points] whenwillyouship:

your articles are always awesome


[1 Points] trappy_AB:

The biggest still standing is Alphabay

You cannot deny it any longer. We are big.