Dark Leviathan

The Silk Road might have started as a libertarian experiment, but it was doomed to end as a fiefdom run by pirate kings

Photo by Alex Majoli/Magnum Photos
is an associate professor of political science and international affairs at George Washington University. His latest book is The Political Economy of Trust (2009).

3,200 words

Edited by Ed Lake

The Hidden Wiki holds the keys to a secret internet. To reach it, you need a special browser that can access ‘Tor Hidden Services’ – websites that have chosen to obscure their physical location. But even this browser isn’t enough. Like the Isla de Muerta in the film Pirates of the Caribbean, the landmarks of this hidden internet can be discovered only by those who already know where they are.

Sites such as the Hidden Wiki provide unreliable treasure maps. They publish lists of the special addresses for sites where you can use Bitcoin to buy drugs or stolen credit card numbers, play strange games, or simply talk, perhaps on subjects too delicate for the open web. The lists are often untrustworthy. Sometimes the addresses are out-of-date. Sometimes they are actively deceptive. One link might lead to a thriving marketplace for buying and selling stolen data; another, to a wrecker’s display of false lights, a cloned site designed to relieve you of your coin and give you nothing in return.

This hidden internet is a product of debates among technology-obsessed libertarians in the 1990s. These radicals hoped to combine cryptography and the internet into a universal solvent that would corrupt the bonds of government tyranny. New currencies, based on recent cryptographic advances, would undermine traditional fiat money, seizing the cash nexus from the grasp of the state. ‘Mix networks’, where everyone’s identity was hidden by multiple layers of encryption, would allow people to talk and engage in economic exchange without the government being able to see.

Plans for cryptographic currencies led to the invention of Bitcoin, while mix networks culminated in Tor. The two technologies manifest different aspects of a common dream – the utopian aspiration to a world where one could talk and do business without worrying about state intervention – and indeed they grew up together. For a long time, the easiest way to spend Bitcoin was at Tor’s archipelago of obfuscated websites.

Like the pirate republics of the 18th century, this virtual underworld mingles liberty and vice. Law enforcement and copyright-protection groups such as the Digital Citizens’ Alliance in Washington, DC, prefer to emphasise the most sordid aspects of Tor’s hidden services – the sellers of drugs, weapons and child pornography. And yet the effort to create a hidden internet was driven by ideology as much as avarice. The network is used by dissidents as well as dope-peddlers. If you live under an authoritarian regime, Tor provides you with a ready-made technology for evading government controls on the internet. Even some of the seedier services trade on a certain idealism. Many libertarians believe that people should be able to buy and sell drugs without government interference, and hoped to build marketplaces to do just that, without violence and gang warfare.

Tor’s anonymity helps criminals by making it harder for the state to identify and detain them. Yet this has an ironic side-effect: it also makes it harder for them to trust each other, because they typically can’t be sure who their interlocutors are. To make money in hidden markets, you need people to trust you, so that they will buy from you and sell to you. Having accomplished this first manoeuvre, the truly successful entrepreneurs go one step further. They become middlemen of trust, guaranteeing relations between others and taking a cut from the proceeds.

To this end, entrepreneurs have found it necessary to create and maintain communities, making rules, enforcing them, punishing rule-breakers, and turning towards violence when all else fails. They have, in effect, built petty versions of the very governments they are fleeing. As the US sociologist Charles Tilly argued, the modern state began as a protection racket, offering its subjects protection against outsiders and each other. The same logic is playing out today on the hidden internet, as would-be petty barons and pirate kings fight to tax and police their subjects while defending themselves against hostile incursions.

No entrepreneur of trust was more successful than the Texan Ross Ulbricht, who, under his ‘Dread Pirate Roberts’ pseudonym, founded and ran the notorious Silk Road marketplace for drugs and other contraband. And no-one better exemplifies how the libertarian dream of freedom from the state turned sour.

Ulbricht built the Silk Road marketplace from nothing, pursuing both a political dream and his own self-interest. However, in making a market he found himself building a micro-state, with increasing levels of bureaucracy and rule‑enforcement and, eventually, the threat of violence against the most dangerous rule‑breakers. Trying to build Galt’s Gulch, he ended up reconstructing Hobbes’s Leviathan; he became the very thing he was trying to escape. But this should not have been a surprise.

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In his memoir Men of Dishonor (1993), the former mafioso Antonino Calderone describes the world of the mafia as one where no fact or statement ever has only one meaning. The mob boss Toto Riina ordered the death of Calderone’s brother and then delivered a glowing encomium to the dead man at his funeral. After betraying his close friend Emanuele D’Agostino to a mafia chief, Rosario Riccobono was rewarded with an invitation to a barbecue at the chief’s estate; he awoke from a post-prandial nap to find his killers looming with a garrote. Stefano Bontade actually knew his murderers well enough to make them coffee before they killed him.

One consequence of all this bloodletting is that criminals must perpetually monitor each other’s statements for subtle intimations of betrayal. As Diego Gambetta, the sociologist of the Sicilian Mafia, put it, they are ‘constantly afraid of being duped, while at the same time they are busy duping others’.

A similar paranoia appears to be even more endemic on the hidden internet, where anonymity is built into the architecture of social interactions. When Sicilian Mafiosi deal with each other, they do at least know each other and can retaliate, often in horrible ways, if they think that they have been cheated. This allows them to maintain a wary peace for much of the time. On the hidden internet, by contrast, people do not know the true identities of those who want to buy or sell.

‘I want to do tons of business but I DO NOT want to be scammed. I wish there were people who were honest crooks’

This creates a problem for all parties. Obviously enough, buyers do not know if they can trust their sellers to deliver or to keep their information safe. If a seller cheats them, they cannot easily retaliate, since they do not know who the seller is. Yet this is a bind for sellers, too. Game theory suggests that without the possibility of retaliation, no buyers will enter into business in the first place, since they have every expectation that they will be cheated. There will, in short, be no market. Sellers will have no-one to sell to, and everyone will be worse off.

Would-be criminals on the hidden internet repeatedly complain that they have been ripped off. In the description of one commenter on the Hidden Wiki:

I have been scammed more than twice now by assholes who say they’re legit when I say I want to purchase stolen credit cards. I want to do tons of business but I DO NOT want to be scammed. I wish there were people who were honest crooks. If anyone could help me out that would be awesome! I just want to buy one at first so I know the seller is legit and honest.

This creates a market niche for intermediaries, who can become entrepreneurs of trust, supporting relationships between buyers and sellers who otherwise would not trust each other. Again, the Sicilian Mafia provides a precedent. Gambetta finds that they began as brokers of trust between buyers and sellers in a rural society without effective laws. The Mafia made money by guaranteeing transactions, threatening cheaters, and sometimes cultivating a general atmosphere of paranoia in order to ensure demand for their services. In other words, it built an informal order of its own, inimical to conventional laws, that gradually began to supplant the traditional state.

When Ulbricht began to grow hallucinogenic mushrooms and sell them on the internet in 2010, he didn’t see himself either as a Mafioso or a state builder. Instead, it appears that he was driven by enthusiasm for the libertarian thinker Murray Rothbard. On his LinkedIn profile, Ulbricht declared his intention to use ‘economic theory as a means to abolish the use of coercion and aggression amongst mankind’, and to build an ‘economic simulation’ that would let people see what it was like to live in a world without the ‘systemic use of force’. At the same time, he didn’t mind turning a profit from his activism – his diary entries show that he was pleased to make money from his first crop of mushrooms, and disappointed that he cashed out his first profits before the price of Bitcoin peaked.

Ulbricht was not, by his own description, a particularly skilled hacker. His early versions of the Silk Road site had serious design and security flaws. Where he excelled was in getting other people to trust him. On the earliest iteration of the site, he sold drugs himself, developing a reputation for good customer service. He processed all transactions by hand, charged no commission and used messaging to talk to buyers and sellers. In this way, he cultivated a web of relationships that could be turned into a fully fledged marketplace.

As the site became larger, it inevitably became more bureaucratic. Long before he started building it, Ulbricht had been advised that he needed to establish metrics for trustworthiness. As soon as he could, he introduced an automated rating system, letting reliable sellers establish a reputation for fair dealing. Ulbricht also created a discussion forum on which visitors could gossip about their experiences with dealers and customers. Payments were handled by an automatic escrow system, under which buyers could lodge funds with the site’s management and refuse to pay until the goods arrived. However, sellers with an established reputation were often able to insist that their customers didn’t use the protections of the escrow system. When payment was made in advance, this was called ‘finalising early’.

Seller pseudonyms provided a rough equivalent to a commercial brand. As the Stanford economist David Kreps has noted, a secured brand name with a reputation for honest dealing is an asset, and the desire to preserve its value can provide the incentive for future honesty. Not that the value is dependent on the actual owner of the name: a trademark can be sold or passed from one individual to another without losing its power. Ulbricht’s own pseudonym suggests that he had given this some thought: the original Dread Pirate Roberts appears in William Goldman’s comic fantasy novel The Princess Bride (1973), where it is a composite identity, passed from pirate captain to pirate captain as a kind of guarantee of fearsomeness.

Sometimes traders wanted to build up a reputation for honest dealing so that they could take the money and run

As Ulbricht transformed a free-flowing market into a structured hierarchy, he began to take a stronger hand in policing the system that he had created. Traders started to find themselves getting banned, for offences such as defrauding customers or trying to bilk the house of its commission. In this, Silk Road appears to have been following a well-trodden path. Game theorists such as Avner Greif and Randall Calvert have argued that this was how the decentralised medieval trading systems gradually gave way to more robust systems based on the centralised power of the state. Ulbricht – and other market builders like him – had recapitulated this developmental history by combining reputation-based incentives and centralised adjudication.

It seems that Ulbricht felt a little defensive about his new political role. In his persona as the Dread Pirate Roberts, he claimed in Silk Road forums that there was a fundamental difference between an organisation such as Silk Road and a state. Silk Road was ‘regulated by market forces, not a central power’, and even he, the Dread Pirate Roberts, was subject to market competition. If sellers and customers didn’t like the rules he made, they could go to other drug bazaars on the hidden web. He acknowledged the theoretical possibility that ‘voluntary organisations’ such as his site might spy on users, imprison them or even kill them. This would indeed mean that ‘[W]e’re back to where we started, the present day state.’ However, he insisted, market competition would make sure that this never came to pass.

Yet market competition was no guarantee of honesty. Sometimes traders wanted to build up a reputation for honest dealing so that they could take the money and run. Several scammers gamed the system by establishing themselves as apparently reliable drug dealers, making a large number of near-simultaneous sales, demanding that customers finalise the payment before they got the goods and then disappearing with the money. Since the scammers used pseudonyms and Tor just like everyone else, outraged customers could do little except issue grandiose threats in the discussion forum.

They were vulnerable to more profound betrayals, too. Customers had to give mailing addresses to dealers if they wanted their drugs delivered. Under Silk Road’s rules, dealers were supposed to delete this information as soon as the transaction was finished. However, it was impossible for Ulbricht to enforce this rule unless (as happened once) a dealer admitted that he had kept the names and addresses. It’s likely that Silk Road dealers systematically broke these rules. At least one former Silk Road dealer, Michael Duch, who testified at Ulbricht’s trial, kept the names and addresses of all his clients in a handy spreadsheet.

order and civility depend on threats of violence – whether embedded in the laws of state, or the bloody interventions of mob bosses

This created an obvious vulnerability – indeed, an existential threat to Ulbricht’s business. If any reasonably successful dealer leaked the contact details for users en masse, customers would flee and the site would collapse. And so, when a Silk Road user with the pseudonym FriendlyChemist threatened to do just that, Ulbricht did not invoke Silk Road’s internal rules or rely on impersonal market forces. Instead, he tried to use the final argument of kings: physical violence. He paid $150,000 to someone whom he believed to be a senior member of the Hells Angels to arrange for the murder of his blackmailer, later paying another $500,000 to have associates of FriendlyChemist murdered too.

It is unclear if anyone was, in fact, killed by anyone else. Indeed, it seems most likely that the whole affair was a scam in which FriendlyChemist and his purported assassin were associates (or possibly the same person). Still, it marked the final stage in an extraordinary transformation. Ulbricht began as an idealist, setting out to build a market free from what he described as the ‘thieving murderous mits’ of the state. He ended up paying muscle to protect the bureaucratic system that he had created.

Ulbricht might have been incompetent, but he likely saw himself as having little choice about whether to seek help from real criminals. As money began to flow into the hidden internet, so too did cupidity and Realpolitik. Initially, Ulbricht saw himself as bringing ‘order and civility’ to a black market where others, like him, were committed to libertarian ideals. Yet order in actual markets depends on threats of violence – whether the penalties embedded in the laws of the state, or the bloody interventions of mob bosses. In the absence of such arrangements, predators move in. The Silk Road’s business model worked only if genuinely ruthless people didn’t notice its critical vulnerabilities. As soon as it began to attract attention – and earn enormous amounts of money – its course was set.

Ulbricht’s diaries make it clear that he was already living on the sufferance of other criminals who had no particular attachment to libertarian ideals. He was paying hundreds of thousands of dollars to stave off denial-of-service attacks that threatened to cripple his website. The fragile web of trust upon which the market depended would have collapsed had any mid-sized Silk Road dealer revealed his list of customers. In this light, it’s no surprise that Ulbricht wanted to make common cause with a notoriously violent gang, educating them about online drug markets while they mentored him on how to neutralise threats to his business model. He desperately needed protection.

The libertarian hope that markets could sustain themselves through free association and choice is a chimera with a toxic sting in its tail

Beneath the particular details of Ulbricht’s story, we find an entirely typical progression. It is no surprise to learn that other drug marketplaces on the secret internet are also responding to the same pressures by becoming ever more like miniature states; policing the industry of their members within, guarding ever more ferociously against dangers from without. Like Hobbes’s sovereign Leviathans, they are in continuous jealousies, maintaining internal industry while having their weapons pointed and eyes fixed upon each other.

After Ulbricht’s arrest in October 2013, a few of his old crew tried to set up a new marketplace, the Silk Road 2. When this site came under attack, the new Dread Pirate Roberts retaliated against the marketplace that he believed was responsible for the aggression, hacking into its systems to seize a list of its customers’ names and addresses and hence wreak catastrophe upon its business. Other markets, such as the aptly named Sheep Marketplace (which disappeared with tens of millions of dollars’ worth of Bitcoin) are simply fleecing their customers and getting out of the game.

All of these petty principalities are vulnerable to criminals trying to extract ransom, and increasingly to law enforcement, which has inveigled its way into trusted positions so that it can gather information and destroy illicit marketplaces. The libertarian hope that markets could sustain themselves through free association and choice is a chimera with a toxic sting in its tail. Without state enforcement, the secret drug markets of Tor hidden services are coming to resemble an anarchic state of nature in which self-help dominates.

Ulbricht’s carelessness brought about the early demise of Silk Road. But if he hadn’t been stupid, the marketplace would have soon collapsed under its own weight, or become the creature of larger organisations with a far greater capacity for violence. The libertarian dream of free online drug markets that can magically and peacefully regulate themselves is just that: a dream. Playing at pirates is only fun as long as the other players are kids too. The trouble is, once adults with real swords appear, it may be too late to wake up.

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