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OPINIONS

Bitcoin after Silk Road

When the FBI shuttered Silk Road, a popular Bitcoin-backed online black market, the value of Bitcoin fell from over $141 to below $110. Nonetheless, the end of Silk Road represents a turning point– people will innovate to make Bitcoin more robust and decentralized than it ever has been.

In particular, Bitcoin threatens to redefine the concept of currency as we know it, and the aftermath of Silk Road’s fall proves it.

Other popular illicit marketplaces shut down after Silk Road’s demise, and the FBI caught several Silk Road drug dealers. Many prior users are paranoid of trusting new marketplaces, thinking they may just be DEA honeypots and that the NSA may have already cracked encryption technologies like PGP, rendering online anonymity futile.

Some speculate that Bitcoin, an anonymous digital currency introduced at the start of 2009, will have trouble rebounding from the loss of its biggest illegal marketplace. Some even believe that Silk Road’s collapse will accelerate the regulation of Bitcoin because it reveals how the currency’s anonymity encourages tax evasion.

That couldn’t be further from the case. People already see Bitcoin as a currency whose domain extends beyond the black market. Drug sales account for only about half a percent of all Bitcoin transactions, and some brick and mortar stores, like the forward-thinking Coupa Café in Palo Alto, now accept Bitcoin.

Silk Road’s fall made it clear that for Bitcoin to become truly anonymous, transactions need to be decentralized and untraceable. If that goal becomes a reality, Bitcoin can change the way governments and currencies work forever.

Some have already proposed new marketplace structures to counter Silk Road’s failures. Its centralized nature likely caused its eventual failure (along with Silk Road founder Ross Ulbricht’s carelessness), causing ideas like a “federated distributed social network” for Bitcoin trade to top startup incubator Y-Combinator’s news website.

Others are tackling deficiencies in Bitcoin itself by building more layers of privacy. Because Bitcoin transactions are public, some doubt the anonymity of Bitcoin transactions. In order to obscure the flow of Bitcoin, people often run Bitcoins through Bitcoin tumblers. Tumblers hide the true origin of your money by replacing your Bitcoins with a mixture of random Bitcoins with different transaction histories.

Silk Road used its own centralized tumbler, making it useless for privacy when it got compromised. Therefore, new systems like Zerocoin hope to ensure decentralized, untrackable Bitcoin transactions.

All signs point to the acceleration of Bitcoin becoming a truly untraceable currency.

Silk Road served not just as a black market, but also as a massive social experiment. It helped people explore the benefits of having a crowd-regulated drug market. Silk Road’s robust reviewing system and security features made it a prime place to buy substances with confidence in their purity. Many active Silk Road users heralded the service as a leader of safe drug use because the illegality of drugs prevents their regulation. It is impossible to distinguish between what street dealers claim they sell and their actual products, but by allowing online dealers to establish trust while maintaining anonymity, buyers could purchase and consume drugs more safely.

Silk Road also prompted people to discover the important features of anonymous marketplaces in general. In its wake, many are working to correct flaws in Silk Road and Bitcoin’s designs.

Inevitably, a more robust system will rise to meet the needs of the public. In the midst of the recent NSA fiasco, ever-shifting drug legality and financial turmoil in the wake of the recent U.S. government shutdown, Bitcoin has a chance to fundamentally change the way currency works.

By being government-independent, difficult to track and decentralizable, Bitcoin threatens to reduce trade to the mere exchange of data, making currency as unregulatable as MP3s.

Silk Road’s demise closely resembles the shutdown of pre-eminent BitTorrent piracy site, Oink’s Pink Palace (OiNK). In OiNK’s wake, a slew of alternatives arose, growing well beyond OiNK’s original size. One such site, what.cd, even implemented an open-source BitTorrent tracker that anyone can use to make a torrent site, showing just how difficult it is for governments to control how people use the web.

BitTorrent is reducing digital media to the exchange of data. Bitcoin is abstracting away the exchange of money, and in the same vein, emerging 3D printing technology may represent the digitization and eventual piracy of physical goods.

Where Silk Road fell, the Bitcoin market is split wide open for innovation, growth and rebirth. Whatever happens, the times, they are a-changin’, and count me excited to see what’s on the horizon.

Contact Omar Diab at odiab@stanford.edu

  • Schalk Dormehl

    Zerocoin is not necessary to make Bitcoin private.
    Multi-input transactions are already possible on the block chain that make it very expensive to try to track funds. Google: Trustless, anonymous mixing.

  • osdiab

    Is that protocol provably secure, though? I’m not enough of an expert to make the analysis myself, and I can’t find a released analysis of its anonymity. One commenter at http://bitcoinmagazine.com/6630/trustless-bitcoin-anonymity-here-at-last/ posited that you still need to trust the other people in the room and the room itself we a collective entity; one could make anonymous rooms full of fake users except for the last one, simply to mine the block chain for an address that is attempting to launder money, or to intercept the transaction. The room formation process may be able to handle that, but I didn’t find details. This is just an example but i certainly have not mulled it over enough to make a real evaluation.

    Have a link or some commentary to corroborate trustless, anonymous mixing?

  • Joey Schmoey

    Just because the FBI has the addresses of incoming btc of silk road doesn’t mean they know anything about who owns them or where the addresses come from. Also, it would not be proof that the coins were actually used in illegal activity as lots of people just use the online wallets for mixing.

  • TastelessTech

    Bitcoin is now higher than it was before the bust at 147. It may be a shocking number to post, but not smart journalism.

  • osdiab

    This was written and published in print before it was published online, and at the time it was around 120.

  • osdiab

    This is true, but the point is that the blockchain provides a means of approximating to some level of certainty who an address belongs to. Ideally, that shouldn’t be possible at all.

    But yes, you are right, with some extra precautions people can harden themselves to those kinds of attacks and the system right now at least makes it inconvenient to do that kind of analysis. It would still be better if Bitcoin laundries were distributed, though, since at a minimum the Silk Road mixer was compromised – if a dealer thought that was enough to secure their identity, then they may be in for a rougher time.

  • Wucris

    Whow Whow Whow.

    Bitcoin is praised for being decentralized. Now sure it is somewhat traceable but laregly remains anonymous. But to go ahead and write an article and calling bitcoin centralized shows the lack of knowledge by the author.

    If bitcoin and silk road in the media has taught me anything is that the media is filled with misinformation, likly because the authors write these articles after recently finding out about these technologies themselves.

  • Guest

    The argument was not that Bitcoin is centralized. Reread it.

    The argument is::

    a) while Bitcoin is decentralized, it relies on the blockchain publicly showing all transactions between Bitcoin addresses. This is fine and dandy, except that…
    b) Even with multiple Bitcoin addresses involved, it is possible in some cases to uncover what addresses correspond to the same Bitcoin user, and sometimes through the transaction network who those users actually are. I couldn’t go through the technical details in the article because I have a limit, but I gave plenty of links to corroborate that.
    c) Bitcoin laundries are not fully secure if they are centralized, like Silk Road’s was. So tools to obfuscate identity are by and large flawed.
    d) Silk Road falling has brought attention to this, and now people are talking more about ways to decentralize the parts of Bitcoin marketplaces that aren’t, as well as hardening Bitcoin to those kinds of attacks.

  • Guest

    The argument was not that Bitcoin is centralized. Reread it.

    The argument is::

    a) while Bitcoin is decentralized, it relies on the blockchain publicly showing all transactions between Bitcoin addresses. This is fine and dandy, except that…
    b) Even with multiple Bitcoin addresses involved, it is possible in some cases to uncover what addresses correspond to the same Bitcoin user, and sometimes through the transaction network who those users actually are. I couldn’t go through the technical details in the article because I have a limit, but I gave plenty of links to corroborate that.
    c) Bitcoin laundries are not fully secure if they are centralized, like Silk Road’s was. So tools to obfuscate identity are by and large flawed.
    d) Silk Road falling has brought attention to this, and now people are talking more about ways to decentralize the parts of Bitcoin marketplaces that aren’t, as well as hardening Bitcoin to those kinds of attacks.

  • Guest

    The argument was not that Bitcoin is centralized. Read the whole article before jumping on the first sentence and claiming a false sense of superiority.

    The argument is::

    a) while Bitcoin is decentralized, it relies on the blockchain publicly showing all transactions between Bitcoin addresses. This is fine and dandy, except that…

    b) Even with multiple Bitcoin addresses involved, it is possible in some cases to uncover what addresses correspond to the same Bitcoin user, and sometimes through the transaction network who those users actually are. I couldn’t go through the technical details in the article because I have a limit, but I gave plenty of links to corroborate that.

    c) Bitcoin laundries are not fully secure if they are centralized, like Silk Road’s was. So tools to obfuscate identity are by and large flawed.

    d) Silk Road falling has brought attention to this, and now people are talking more about ways to decentralize the parts of Bitcoin marketplaces that aren’t, as well as hardening Bitcoin to those kinds of attacks.

    Fair?

  • osdiab

    My argument was not that Bitcoin is centralized. Read the whole article before jumping on the first sentence and claiming a false sense of superiority.

    My argument is NOT that Bitcoin is now compromised and everything is over. Rather, my argument is:

    a) while Bitcoin is decentralized, it relies on the blockchain publicly showing all transactions between Bitcoin addresses. This is fine and dandy, except that…

    b) Even with multiple Bitcoin addresses involved, it is possible in some cases to uncover what addresses correspond to the same Bitcoin user, and sometimes by analyzing the graph of transactions, one can find out who those users actually are. I couldn’t go through the technical details in the article because I have a word limit, but I gave plenty of links to corroborate that.

    c) Bitcoin laundries, the predominant means of combatting that potential vulnerability are not fully secure if they are centralized, like Silk Road’s was. So current tools to obfuscate identity further are by and large flawed.

    d) Silk Road falling has brought attention to this, and now people are talking more about ways to decentralize the parts of Bitcoin marketplaces that aren’t decentralized already, as well as hardening Bitcoin to those kinds of attacks.

    e) This work will make Bitcoin stronger than it was before, no matter what people say about it’s value and credibility falling.

    Fair?

  • Adam Merat
  • Cops lie

    Nice article, I’m glad you avoided the obligatory slams on Ross Ulbricht who took on tremendous personal risk to try to demonstrate that people can live freer without the violent element of government regulating their every transaction.

  • Schalk Dormehl

    It is possible to do exactly what you describe.

    If an attacker was tracking one entity, if that entity ever enters a room where there is another legit entrant, then the attacker now has 2 people to track.

    Things like Darkwallet (as I have it) will join away in the background for you, so sooner or later you will meet legit mixers even if 90% of the participants are attackers.

    Another possibility now that Zerocoin is it’s own thing, is to have an opersource exchange that anyone can launch and trade BTC against ZRC. That way you can go into Zerocoin, mint a ZC, cash it in and come back out from another strain of Bitcoins.

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