Silk Road 101: How did the now-busted online black market work? (+video)

Federal authorities have shut down Silk Road, one of the largest websites for drug trafficking and other criminal activities. The site existed under layers of secrecy and used electronic currency.

By , Contributor

Silk Road, a notorious website for drug trafficking and other criminal activities, has been shut down after its alleged operator, Ross Ulbricht, was arrested Tuesday, the Federal Bureau of Investigation announced. Federal prosecutors have charged Mr. Ulbricht with narcotics trafficking, computer hacking, money laundering, and the solicitation of a murder-for-hire.

How did this black market work, and how did it escape law enforcement for a time? Here are the basics about this so-called eBay of illegal drugs.

What was Silk Road?

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Silk Road was an online marketplace that allowed buyers and sellers to conduct all their transactions anonymously. In addition to the cost of goods or services purchased, the site charged a small fee, akin to a shipping cost, to deliver the purchases. While the site’s interface looked benign, the vast majority of transactions involved narcotics, and hit men, firearms, and pornography could also be purchased, according to authorities. 

The site was started around June 18, 2011, according to authorities.

Who ran the site?

The site’s most recent operator, according to the FBI, was Mr. Ulbricht, who worked under the pseudonym “Dread Pirate Roberts,” or “DPR” for short. (Dread Pirate Roberts is a character in the film "The Princess Bride.")

Ulbricht, a graduate of the University of Texas at Dallas, moved to San Francisco in the fall of 2012 and was in transition from a career in physics to work as an investment adviser and entrepreneur, according to his LinkedIn page.

Ulbricht, who is in his late 20s, assumed control of Silk Road in early 2012, according to the criminal complaint.

So what exactly did DPR do on Silk Road?

In an interview with Forbes before Silk Road was shut down, DPR said that the site was a collaborative effort, but that he was in charge of all the “important Silk Road assets,” which included access to private forums and funds. 

Did DPR make a profit from the site?

Silk Road generated sales of roughly $1.2 billion, according to the complaint, and with Ulbricht’s arrest, authorities seized $3.6 million. It is unclear how much of Silk Road’s revenue DPR might have used. 

How did users pay for items?

With Bitcoins: Users had to acquire this electronic currency before they could purchase anything on Silk Road. Transactions on Silk Road accounted for about 5 percent of all exchange transactions carried out with Bitcoins, according to Nicolas Christin, a cybersecurity researcher at Carnegie Mellon University in Pittsburgh. 

The Bitcoin currency is not tied to any government or bank, but rather is controlled through computer software, which means that the value of Bitcoins can fluctuate violently. After Silk Road was closed, the Bitcoin value dropped from more than $140 to $129 in one day.

How was the site accessed?

Silk Road was accessible only via a special computer network known as Tor

To use Tor, users download the Tor browser much as they would Chrome or Firefox. The Tor browser can make anonymous a user's Internet activity by masking his or her Internet protocol (IP) address, which contains information about a computer's location. 

Tor also has a "hidden services" feature that lets users publish a website anonymously by hiding the location of the website's servers. The URL for these Tor-based websites ends in ".onion." (The Tor browser's symbol is an onion.)

Silk Road's most recent URL was silkroadvb5piz3r.onion and could be found in online forums, according to the complaint.     

To log into Silk Road, users had to give a username, password, and the country where they were located. After logging in, users were then able to browse the site as they would any other online store. The vast majority of the goods for sale were illegal drugs, according to reports. 

How does Tor make online activity anonymous?  

Any Web browsing, including e-mail correspondence that is conducted through Tor, is wrapped in layers of encryption, making the information virtually impossible for an outside party to discern. Encryption works by jumbling data into a series of numbers that unscramble only when one has the correct "key" to "unlock" or reorder them. 

If Tor really works, what led the FBI to Ulbricht?

Ulbricht left a trail of comments on online forums that seemed suspicious to the FBI agent investigating Silk Road. According to court documents, Ulbricht did not properly disguise his identity in these forums, ultimately allowing the FBI to identify Ulbricht. 

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