Cryptomarkets are online “marketplaces” that are only accessible using encryption software, which hides the identity and location of users. This coding technology makes it difficult for law enforcers to tackle these marketplaces. The markets can be found in the Dark Web, the part of the Internet not indexed by search engines.
The anonymity enables buyers and sellers to conduct illicit trade and considerably reduces the chances of their identity being revealed. On the other hand, this anonymity gives rise to a trust problem: a seller can make off with the buyer's money or sell goods of a (far) lower quality than promised.
On the face of it, this trust problem is nothing new: sellers on the legal market are confronted with similar risks. Previous research suggests that this problem is sharply reduced by reviews and rating systems: the possibility to publicly share sellers' good and bad performances. These research results are mostly based on small experiments and on data from online markets that are embedded in a functioning legal system. It is not clear whether such a "good reputation" also provides sufficient trust in an environment without a legal safety net and in complete anonymity. In brief, an environment that can attract more opportunists and makes fraud easier.
Using a dataset of transactions on the first cryptomarket for illegal drugs – Silk Road – the researchers analysed the effect of buyers' assessments for completed transactions on the success of sellers. Sellers with a better rating history were found to ask higher prices and to sell their products faster than sellers with a poor or no assessment history. These results reveal how reputation creates an incentive for collaboration on a large-scale, even between anonymous traders with doubtful intentions and where there is no legal enforcement. The research therefore casts doubt on the need for an institutional and societal embedding of parties as a condition for the development of a social order within a trading market.
Przepiorka, W., Norbutas, L. & Corten, R. (2017). Order without Law: Reputation Promotes Cooperation in a Cryptomarket for Illegal Drugs. NSCR/Utrecht University