A note on market lifetimes

http://slatestarscratchpad.tumblr.com/post/116736440606/the-libertarian-hope-that-markets-could-sustain

2. Because drugs are illegal, the people running the markets are running a gradually increasing risk of getting caught and jailed. Suppose it's 25% per year. At that point, being a stationary bandit is off the table - if you play honest and try to make a moderate amount every year, you'll probably be jailed by year five. This changes your time preference to the extreme short-term - your goal is to make money as quickly as possible, then get out. That attracts the sort of people who who want to spend a short amount of time selling drugs, then run away with $10 million.

As it happens, one of my projects is estimating that risk by collecting information about lifetimes: http://www.gwern.net/Black-market%20survival

Scott is right that the risk is substantial to running a black-market; while in practice, few people have been busted for running a market (thus far just SR1/SR2/Utopia/Hydra and probably Sheep, out of 70+ markets), this seems to be due in large part because the lifespan of most markets is short and the median is under a year - markets close down before they are found by LE.

Scott is wrong in thinking that the only risk jailing: the risk is (especially for young markets) slightly higher for being hacked and losing all the bitcoins and hence your future commissions (since either you work for free and pay back deposits with incoming commissions, or you are forced to shut down and earn nothing further).

Specifically, I currently estimate the cumulative risk of LE+hackers terminating a black-market at 35% over a time-period of <3 years. This is quite significant and likely a factor in why markets such as Evolution have chosen to exit-scam: if you are turning over hundreds of thousands of USD per month, at some point more is not very helpful since you still have to find a way to cash out safely (an issue as Sheep Marketplace has discovered). And 35% is just the point-estimate - the real risk could be as high as <70% (but also low as <20%). See the graph: https://i.imgur.com/6W68sQF.png

Given this, the question for the big old markets like Agora may not be so much 'why do they exit scam' as 'why didn't they exit scam before?'

Full code:

library(XML)
black <- readHTMLTable("http://www.gwern.net/Black-market%20survival",
                       colClasses = c("factor", as.Date, as.Date, "logical", "factor", "logical",
                                      "character", "logical", "logical", "logical", "logical",
                                      "logical", "logical", "factor", "logical", "logical",
                                      "integer", "logical", "character"))[[1]]
black[black$Codebase=="",]$Codebase <- "unknown"
black$Start <- as.Date(black$Start); black$End <- as.Date(black$End)
black[is.na(black$End),]$End <- Sys.Date() # assuming the table is up to date
black$Age <- black$End - black$Start
black$Age <- as.integer(black$End - black$Start)

black[black$Closure == "voluntary",]$Closure <- "scam"

# for competing-risks modeling
levels(black$Closure) <- c("alive", "hacked", "raided", "scam", "voluntary") # sets "" to "alive"
library(cmprsk)
blackc <- with(black, cuminc(Age, Closure, cencode="alive"))
cumulativeRisks <- timepoints(blackc, c(365, 365*2, 975)); cumulativeRisks$est
##                   365          730          975
## 1 hacked 0.1228233458 0.1228233458 0.1828680140
## 1 raided 0.1074363535 0.1074363535 0.1674810216
## 1 scam   0.6296360751 0.6496509645 0.6496509645

# hack+LE risk at <3 years:
cumulativeRisks$est[,3][1] + cumulativeRisks$est[,3][2]
## 0.3503490355

plot(blackc, col=c(1:4), lty=1, xlab="Days", curvlab=c('hacked','raided','scam'))
for (i in 1:3){
    cltype <- names(blackc)[i]
    ctm <- blackc[[cltype]]$time
    cest <- blackc[[cltype]]$est
    cvar <- blackc[[cltype]]$var
    clo <- cest ^ exp(-1.96*sqrt(cvar)/(cest*log(cest)))
    chi <- cest ^ exp(1.96*sqrt(cvar)/(cest*log(cest)))
    lines(ctm[2:length(ctm)], chi[2:length(ctm)], col=i, lty=2, lwd=0.7)
    lines(ctm[2:length(ctm)],clo[2:length(ctm)] , col=i, lty=2, lwd=0.7)
}
## https://i.imgur.com/6W68sQF.png

(Note that I have been rethinking my distinction between 'voluntary' and 'exit scam' as market outcomes, since I am increasingly uncertain that any markets other than BMR and TMP actually have returned all funds to buyers/sellers rather than just taking whatever is left either quietly or noisily. So for this analysis, I lump those two outcomes together; just consider the 'exit-scam' label in the graph to be more of a 'other causes' label.)


Comments


[8 Points] None:

Excuse my ignorance but whats to stop popular markets from re-releasing their markets under a new name and with new code to throw off LE & Hackers?

I'm no web developer so if its work/time constraints I could understand but it seems like a solution thats possible with the amount of coin some markets bring in.


[5 Points] None:

Given this, the question for the big old markets like Agora may not be so much 'why do they exit scam' as 'why didn't they exit scam before?'

I've wondered this as well. Given the difficulty in laundering money, especially bitcoin, it seems like as soon as you can get away with a few million you have hit the knee in the curve. You are going to work a lot harder to every get to spend $3M+ than that first $3M or so.

A few possibilities:

A) They are idealists and want to keep a free and open market for their customers. This seems pretty unlikely.
B) They get off on the thrill and power of the market. This seems much more likely, and I would put Ross in this category.
C) They have access to extensive money laundering resources, foreign protection, etc. and want to keep the cash cow going as long as they can.


[5 Points] None:

I see, I see. I agree. Someone should fix this problem. Will you be the one to step up? Ask yourself.


[3 Points] sillysally11:

Really good post, thank you.


[3 Points] None:

[deleted]


[3 Points] TotesMessenger:

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[3 Points] IGetDankShit:

Utopia would have probably been pretty damn popular if it didn't get shut down so early. It's the only market I know of that came endorsed by another highly successful market. If Agora was to gracefully exit like BMR did and they endorsed another market on the way out, that might be a way to prolong their profits. They could earn royalties from or have ownership in the new market and it might delay LE at the same time.

Also, I'm not one to be a conspiracy theorist, but I was just thinking that if Backopy was the one to report the Utopia folks to LE, he would have pulled off an almost perfect crime. Retired with who knows how many bitcoins and also threw LE a bone so they'd stop spending time on him, assuming he shut down because he got tipped off about an investigation closing in.


[2 Points] None:

I wonder if passing off a market to a new owner, a story DPR tried to construct, would decrease the chances of seizure/scam? Probably better to just close up shop like BMR and let a new one crop up.


[2 Points] high_dragonfly:

This is dope as fuck keep up the good work


[2 Points] hacksforcrack:

I was reading through this on your site. I was really impressed with you going through the work of doing the statistical analysis in R which gave me a nerd boner.


[2 Points] isthismdma:

Well, Nassim Taleb would disagree.


[1 Points] crondom90:

What is a possible solution for this? decentralized market?


[1 Points] None:

Out of pure Gwern superior knowledge, i'm curious what you think the life expectancy of Agora is, i understand theres alot of factor's, but if you could try, i'd appreciate it buddy.


[1 Points] BTVA:

I imagine the number of claimed hacks is much higher than the real number.


[1 Points] alphabigmouth:

Your analysis both here and in the comments is spot-on and well thought out. A great article gwern.


[1 Points] upforanything11:

Hey GWEN do you mind translating all that shit in layman's terms


[1 Points] jtronicustard:

This analysis is more or less an appeal to history. The lifespan of the market is affected by a number of variables influenced by uncontrolled variables (LE funding, public awareness of DNMs, cartels, etc). Gwern's assertion that the operators of the markets will always be able to escape undetected is based on the assumption the exchanges will follow the same rules indefinitely, therefore binding admins to certain behaviors and options.

The lack of stability in the markets prevents anyone from making an accurate lifespan prediction. The rules and practices of DNMs will change to maintain their operability, which will have effects on the options and subsequent actions of the admins. Although this piece IS good in a historical context, it is just a snapshot. Using it as a predictor of DNM behavior doesn't work.


[0 Points] hahahahhahqq:

LE hasn't found a way to shut Agora down in a 17 months period they are nowhere near 35 % they are at 0 % and might be at 100% one day if they get lucky