Dark web markets consolidate as competition takes its toll

Competition, not COVID-19, may be to blame for a fall in dark market numbers

Fewer dark web markets are competing for illicit online revenues, according to research from cryptocurrency forensics company Chainalysis, which analyzes blockchain transactions for government agencies and financial institutions.

Chainalysis came to this conclusion by researching transaction trends in dark web marketplaces, which connect buyers and sellers for illicit transactions. Most of these dark web transactions center on drug sales.

Researchers noticed a trend when they compared dark market revenues to the number of transactions. While revenues have been increasing, the number of cryptocurrency transfers to dark web markets has dropped.

Year-to-date dark market revenues hit over $1.5 billion as of November 2020, up from just over $1.4 billion in all of 2019. Conversely, the number of dark market transactions decreased from around 13 million in 2019 to just over nine million this year, sending them back to 2018 levels.

With dark web markets receiving fewer high-value transactions, Chainalysis suggests buyers’ nature may be changing, with casual buyers giving way to more organized buyers who potentially sell on the drugs they purchase online. Alternatively, the company muses that regular buyers may merely be stocking up during uncertain times.

The consolidation in transactions mirrors the decrease in the number of dark web markets. There are just 37 active markets as of November 2020, down from an all-time peak of almost 60 in February.

"We saw no such decline in 2019," the company said. "In fact, this year’s decline in active markets follows a period of sustained growth in the number of active markets from 2018 through February 2020." Dark web markets are now at their lowest numbers since November 2017, it added.

The COVID effect has disrupted dark markets, said Chainalysis. Frequent complaints from buyers reflect the difficulty of getting illicit goods delivered via the regular postal service. Another study in the International Journal of Drug Policy (ITJP) also acknowledged the pandemic’s disruptive effect on dark market drug deliveries. However, that study pointed out that the markets adapted quickly to pandemic conditions.

Chainalysis' numbers bear this out. It saw the number of bitcoins sent to dark web markets drop at the beginning of the pandemic but noted the situation quickly righted itself. Revenues resumed their growth in May, with subsequent monthly dips following annual trends.

The ITJP study’s authors told Chainalysis that competition and frequent flurries of DDoS attacks were just as problematic for dark web market operators in the medium to long term. With so many markets competing for business, the risk for many operators may outweigh the reward. Some simply shut down — often taking their customers' money with them.

Chainalysis argued that dark markets might be following the same power consolidation we see in any rapidly developing, high-velocity business, such as technology. Fewer of these operations might be gaining a larger share of the market, mirroring the concentration of power among a few large players in the tech space.

"Darknet market consolidation may be the result of competitive forces endemic to the category itself, with Covid at most simply speeding up a trend that already existed," it concluded.

The company will release its full report in January 2021.

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