What is the Silk Road marketplace?

Operating as a hidden site on the Tor privacy network, all transactions on Silk Road were made anonymously using bitcoin. While the marketplace sold a variety of products, it was known for the sale of illegal drugs. During its short lifespan, Silk Road was highly profitable with over 100,000 buyers and an estimated $200 million in sales.

The site was created and operated by Ross Ulbricht, who used the pseudonym Dread Pirate Roberts (DPR). Ulbricht’s identity was discovered in 2013 and he was subsequently arrested by the FBI. The site was shut down and 144,000 bitcoin were seized by the government, with further bitcoin reclaimed in later years. Ulbricht was convicted of multiple drug trafficking and money laundering offenses and given a sentence of life imprisonment without the possibility of parole.

Silk Road holds a complex place in Bitcoin’s history. While it marked the first time a cryptocurrency was used as a means of exchange in a global marketplace, it made both lawmakers and the public associate Bitcoin with crime, an image that still resonates today.

Creation of Silk Road Marketplace

Silk Road was the brainchild of Ross Ulbricht, an amateur programmer and entrepreneur. Ulbricht had the idea for a marketplace where users can buy and sell products anonymously without the oversight of the government or a central bank, concepts that he thought adhered to his libertarian beliefs.

Ulbricht believed that people have the right to freely offer goods and services in the open market. Like many libertarians, Ulbricht viewed drug use as a personal choice and thought that legalizing drugs would result in a higher quality product which would protect users.

The Silk Road Marketplace launched in 2011, and started with Ulbricht selling psychedelic mushrooms that he grew himself. The name “Silk Road” came from the historic Eurasian trade route that operated during the second century BCE until the mid-15th century.

The marketplace grew quickly, with over a thousand registered users in the first two months. The userbase continued to expand after Gawker, an online gossip publication, wrote an in-depth article titled, “The Underground Website Where You Can Buy Any Drug Imaginable,” a few months later.

Tor network

Silk Road was run on the Tor network, an open-source, volunteer-operated privacy network. The technology was initially created in the mid 1990’s by the US Navy to relay sensitive government communications and was later released to the public under a free license.

Tor uses onion routing, a technique that encapsulates messages through layers of encryption (resembling the layers of an onion) and routes web traffic through intermediary servers. This process obscures users’ IP addresses and locations and protects personal privacy. While the Tor network is free and legal to use in the United States, it has been associated with both legal and illicit activity.

Role of Bitcoin

While users were able obscure their online addresses, Ulbricht was faced with the problem of anonymous money transfers. Using a credit card like most online marketplaces would tie purchases back to individuals, which would allow the government to monitor illicit activity.

Ulbricht had been interested in Bitcoin since 2010, attracted to its purported anonymity and the ability to transact without the oversight of a central entity. Although Bitcoin was in its early days, the cryptocurrency was growing in popularity, and Ulbricht believed it could help protect users’ identities.

By using Bitcoin, the only information the buyer had to provide was a physical address to send the product to, which many did via anonymous PO boxes.

Silk Road’s payment system consisted of an online “bank” where users held an account funded with their bitcoin. When a user bought something on the marketplace, the funds were moved into an escrow account maintained by Silk Road and held there until the transaction was complete. Once completed, the funds were transferred to the vendor’s account. Silk Road took a commission of every sale, ranging from 8-15% of the total.

Marketplace overview

Silk Road became known for the buying and selling of illegal drugs, which amounted to 70% of the site’s sales. When the site was shut down, it had generated an estimated $46 million in marijuana sales, $8.9 million in heroin sales, and $17.4 million in cocaine sales.

The marketplace also sold legal goods and services such as art, books, cigarettes, erotica, and clothes. In its terms of service, the site prohibited the sale of products whose purpose was to “harm or defraud,” including child abuse material, stolen credit cards, weapons, and assassinations.

Users were impressed with the professionalism of the site, which employed a review system like Amazon and eBay. Buyers were able to assess the legitimacy of the seller and authenticity of the product from the reviews, a stark contrast from the traditional drug trade. One vendor’s five-star review read: “Excellent quality. Packing, and communication. Arrived exactly as described.”

Critics later noted the casual nature of buying drugs through the marketplace.

Ulbricht’s arrest and closure of the site

Silk Road was under investigation for years by multiple US agencies, including the FBI, DEA, and IRS. A break in the case came when an IRS investigator connected the username “altoid” in an announcement for the Silk Road website to a deleted post on another forum under the same username that asked for programming help. The post contained an email address that included Ulbricht’s actual name.

Ubricht was arrested at the San Francisco Public Library in October 2013, with federal agents acting quickly to grab his laptop before any software or files could be deleted. The website was subsequently shut down.

In 2014, Ulbricht was convicted on all charges and given a sentence of life in prison without the possibility of parole. Investigators found that six people fatally overdosed on drugs that were purchased on Silk Road, which may have factored into Ulbricht’s sentencing.

There were 130 other arrests connected with Silk Road, including one of the top drug sellers named Cornelius Sloop who received a 10-year prison sentence.

Impact on the cryptocurrency community

Silk Road holds a mixed legacy in Bitcoin’s history. The marketplace was a fertile testing ground for the validity of crypto and provided an example of how it could function in the real world.

The marketplace was highly profitable. By the time it was shut down, approximately 80% of all bitcoin in existence had gone through Silk Road at some point. Both governments and the public saw that digital currencies can be used as a valid means of exchange and started taking crypto seriously.

Further, supporters say that Silk Road leveraged blockchain technology to create a thriving community outside of the watch of governments and big banks.

However, the marketplace was one of the first high-profile incidents of criminal conduct with cryptocurrency. It clouded public perception of Bitcoin as being used primarily for illicit activity and led to politicians talking about restrictions around its use. At the time, New York Senator Chuck Schumer said: “[Bitcoin is] an online form of money laundering used to disguise the source of money, and to disguise who’s both selling and buying the drug.”

The association between cryptocurrency and crime is a stigma that persists today. There are still regulators who call for banning cryptocurrency to combat ransomware and other digital crimes.

Silk Road essentials

• Silk Road Marketplace was an online black market mostly selling illegal drugs that ran from 2011-2013.
• Silk Road was shut down in 2013 and its creator, Ross Ulbricht, was given a lengthy prison sentence.
• While Silk Road represented the first time Bitcoin was successfully used as a currency on a global scale, it generated public distrust by tying crypto to criminal activity.