The black market for trading with Bitcoin, what's worth learning

Editor's note: Joel Monegro, an investor in the famous American venture, has written several articles on Bitcoin over the past few months, causing much discussion. This time, he delves into the online black market, which is traded on Bitcoin, hoping to learn some lessons worth spreading to the legitimate market.

Over the past few weeks, I've been to a number of online black markets (Deep Web marketplaces), which are known for buying drugs in bitcoin. I want to see if we can learn something from these illegal commodity markets and apply them to the legitimate market for USV investments.

As part of my research, I bought a pair of boots on Reddit's online mall evolution to deepen my understanding of the dynamic rules of these markets. Here's what I learned in this process:

Privacy

The only access to the online black market is to use Tor, a centralized computer network that hides the user's IP address and is difficult to track.

Most shopping malls require you to register before browsing the page, which includes setting the username, password, and pin number of an account. You also need to remember an auxiliary memory key, this key is not stored on the mall's server.

Most sellers (especially drug dealers) need all communication to be encrypted with PGP, and most malls have a personal page option for PGP encryption.

When the entire transaction process is completed within 30 days, some mall will automatically delete all the order information on the server. The entire buyer and seller of communication between will not use email, only to the center of Peer-to-peer Information Communication protocol Bitmessage, or use of the mall's encrypted information communication system, it will periodically delete information.

Brand and reputation

For sellers, branding and reputation are everything. Buyers judge sellers by comments like ebay.

In an environment where there is no real identity between each participant, branding and reputation are extremely important. On the contrary, on ebay, I don't know the real identity of the seller, but I know ebay knows the real identity of the seller.

Most have more than 95% positive evaluations, and some sellers have done more than 10,000 deals.

Many sellers sell goods on multiple online black markets and often point out their own addresses on other market platforms to build credibility.

The entire online mall has built community-coordinated sellers way beyond ebay's comments. A large number of malls have separate community forums where users can comment on sellers and products.
For new sellers, a quick way to build credibility is to get comments from community members.

These forums usually have regular members, and sellers often send them a sample of comments.

Flow of funds

Before you go shopping, you'll get a public key to the Bitcoin, and you'll have to save it in here. You can buy Bitcoin on an exchange and you can make the deal anonymous by spending a little bit of money.

Third party custody

Third-party custody is provided by market-makers, which are paramount to their business model.

To make a profit, the market will take a little bit of money from the service.

What you learn:

In a market system in which there is no guarantee of trust and security, a seller's brand and reputation are extremely important. This is also a central distribution in many online black markets, as sellers need to ensure that their brands are spread across multiple sites and forums.

The markets themselves are likely to be held at any time, or have been arrested by the FBI, but sellers need to maintain their reputations.

Markets can benefit from where costs are incurred. Because Bitcoin trading is a commodity in itself, a high conversion rate and a complex cost structure are unsustainable for business models. This leads to a thin hierarchy between supply and demand, with a small transaction cost (as low as 2%) to ensure the operation of some key services (enforcement contracts).

The entire market network can be self-management, only need the network manager a little bit of participation. If the network is likened to the government, then these market networks are like a small free country.

Peer-to-peer trading without middlemen can work, relying on the reputation and discounting of suppliers.

Through these market platforms, we can continue to think about how block chains and other new technologies will affect traditional trading patterns. For example, the Bitcoin business model does not trade fees at all, or the transaction costs are extremely low, compared to the rate of market.

I am also puzzled how to establish the network effect in the centralized open data set up at the application level of the block chain. Although the online black market is not suitable for this model, the practice of periodically deleting user data is similar to the way the data is stored in a centralized manner, giving up control over the user's information. Perhaps the answer is to create the best product and user experience.

This raises a series of interesting questions for entrepreneurs and investors.

How do you profit from a network that is centralized? Is SaaS on the Web?

How do you create a network effect when you release control of the data? Do you want to build a competitive edge in your product and user experience? Is this way reliable?

We have some ideas, but we have no definite answer.