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Will Hydra’s darknet market tentacles reach the West?

Hydra, Russia’s largest darknet marketplace generated more than $1.2 billion in crypto revenue between June 2019 and July 2020 and now plans to launch a new darknet market targeting Western users.

The following article looks at Hydra’s position in the global darknet market ecosystem and provides an update on its late 2019 ICO. Was it the most illegal token sale to date?

What is Hydra?

The Russian darknet marketplace is one of the largest illegal marketplaces operating on the dark web. The platform was launched in 2015 to provide vendors with the ability to create individual online shops to market their products. It is older than any of the current Western DNMs.

In December 2019, the Hydra team announced several new projects. These included an ICO to fund an expansion into new markets, Eternos, a new DNM for Western users, and AspaNET, an alternative to TOR. While there is uncertainty as to the current status of these projects, in June of this year the Hydra team said that the projects had been delayed due to the pandemic.

Hydra primarily functions as a market for drugs but other contraband such as fake passports, stolen credit cards, and counterfeit currency is also available. In this sense, the market is similar to its pioneering predecessor Silk Road.
HYdra HomepageSource: Hydra

Vendors, such as Walt Disney Drugs, Pyramid Market, and PokemonGo, show off their merchandise, which comes with detailed descriptions and customer reviews to ensure buyers know what they are purchasing.

In many ways, darknet marketplaces like Hydra mimic the user experience of online retail platforms such as Amazon, which is one of the factors that contribute to their popularity with users prepared to engage with illegal market places.

To deliver their product, Hydra vendors use a system of GPS-located hiding spots. Vendors employ a network of couriers who deliver contraband purchases to a previously agreed upon hidden location. Once delivered, the purchaser receives the GPS coordinates for retrieval. This is the world’s most sophisticated DNM distribution system. It means there is no in-person exchange required, and it bypasses the need for government controlled delivery services. This method of delivery is only available in Russia and big cities across The Commonwealth of Independent States (CIS) (Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine).

The primary payment method that facilitates trade on Hydra is bitcoin (BTC). Hydra even shows a price ticker on the top right of its platform to ensure that its users are aware of the current value of bitcoin in both US dollars (USD) and Russian rubles (RUB). A report by blockchain analysis firm Chainanalysis estimates that Hydra generated more than $1.2 billion in crypto revenue between June 2019 and July 2020.

Crypto in Eastern Europe

This month Chainalysis released its _2020 Geography of Cryptocurrency Report. _The report says that while Eastern Europe has the fourth-largest cryptocurrency market by transaction volume of all the regions it tracks, it also has the first and second-ranked countries on its Global Crypto Adoption Index: Ukraine and Russia.

Chainalysis says that Russia and Ukraine take the top positions due to disproportionately high cryptocurrency use across all components of the index. The data suggests that a larger share of Russia and Ukraine citizens have shifted more of their financial activity to cryptocurrency than citizens in other countries.

Chainalysis says that in the 12-month period of the report, it estimates that Russian users sent $16.8 billion USD worth of crypto assets and received $16.6 billion. Ukraine users sent $8.2 billion USD and received $8.0 billion. When accounting for population size, this suggests a higher proportion of crypto asset adoption than other countries, including China and the US.

Chainlink Hydra Report 1Source: Chainanalysis

The report suggests there are several factors driving this trend. Firstly, there is a long standing lack of public trust in Russia and in CIS countries. The public accepts that some level of government, banking and bureaucratic corruption and/or incompetency is part of the fabric of society. For this reason, the idea of using crypto assets to be your own bank, outside of the system, has significant appeal.

Consumers in both countries have a pre-existing familiarity with electronic payments and e-money that may have made cryptocurrency adoption easier. There is also a clear remittances use case for cryptocurrency in Ukraine and other Eastern European countries.

Similarly, security researcher Brian Krebs has argued that one reason that many top hackers tend to come from Russia and the nearby region is due to the fact that these countries have traditionally placed a greater emphasis on teaching information technology in middle and high schools, and yet they lack a Silicon Valley-style pipeline to funnel talented individuals into high-paying jobs.

Darknet markets drive crypto crime in Eastern Europe

The Chainalysis report states that 1.4% of Easten Europe’s $41 billion in total crypto asset transaction volume was used in illicit transactions. The reports says "Darknet markets account for most of Eastern Europe’s illicit value sent in many months during the 12-month period studied, and on the whole account for the vast majority of sending activity, which would indicate a high volume of funds being paid out to darknet vendors in Eastern Europe from the markets themselves. In fact, Eastern Europe accounts for more global darknet market activity than any other region."
Chainlink Hydra 2Source: Chainanalysis

Much of Eastern Europe’s darknet activity takes place on the Hydra Marketplace reports Chainanalysis, which is the sixth-largest service by volume in the region — no other region has a darknet market or other illicit service in its top ten services. The report estimates that Hydra generated more than $1.2 billion in crypto revenue between June 2019 and July 2020.

A 2019 Russian report into Hydra estimated that the marketplace has over 400,000 regular customers with over 2 million registered users.

Eternos and AspaNET

In December 2019, the Hydra team announced an Initial Coin Offering (ICO) in order to raise capital to fund the launch of new projects. These were Eternos, a new multi-language DNM with a potential global user base, and AspaNET, an alternative to TOR. Hydra planned to sell 1,470,000 tokens, priced at $100 per token. Following the launch of Eternos, holders of 101 tokens or more would get 0.00333333% of the monthly profit. At the time Hydra said the new projects would go live in September 2020. Any individual who took part in the ICO would put themself at risk of being charged for financing organized crime activity. At the time Brave New Coin described the proposed Hydra ICO as "the most illegal token sale to date."

The current status of the Hydra ICO and the Eternos project is unknown. Hydra’s plan was to create a new DNM for the Western market. The new DNM would be based on Hydra, but with several additional features such as an encrypted messaging service, a built-in cryptocurrency exchange, an anonymous browser, an AI-powered dispute resolution service, and an OTC marketplace. Of course, there would not be any KYC requirements.

Global dark net markets

Due to the illegal nature of dark net markets, the industry is in a constant state of flux as the dark market operators play a game of cat and mouse with global law enforcement. New markets come and go all the time, and many markets shut down for no reason, or exit scam with user funds.

Last month, one of the world’s largest darknet markets Empire Market went off-line. Details remain murky but it is thought that the owners exit scammed and reports suggest that $30 million in bitcoin held by the market’s admins has been stolen.

Empire Market first went off-line on August 22, 2020. Reports at the time suggested that the market was down due to a distributed denial-of-service (DDoS) attack. DNM markets are frequently targeted by DDoS attacks, either by law enforcement, hackers or rival markets. As the market has not yet appeared again, it’s assumed that the owners have exit scammed.

Given the scale of Hydra and its financial resources, it appears that it has been able to avoid DDoS attacks. A security researcher who follows developments in the dark market scene using the anonymous Twitter handle @DarkDotFail says that an admin from the Dread forum “believes that Russia’s largest darknet market Hydra uses a custom multi-threaded Tor implementation to stay online despite DDoS attacks. It’s hard to verify this, but their uptime is nearly perfect.”

Following the demise of Empire, DNM users have been forced to look for new marketplaces on the dark web. Users share notes and recommendations on underground forums such as Dread and the Reddit forum r/darknet.

Security researcher @DarkDotFail has identified 11 large dark net markets that are operating currently, each with their own quirks. For example, Darkmarket, he suggests, is the first underground marketplace run by women. “They accept Bitcoin and Monero, and run on the Eckmar marketplace script. I normally do not trust Eckmar markets, but this team is trusted by most major vendors. 1400 vendors, 220k users, according to their counts.”

Other markets mentioned include Cannazon, “a cannabis-only market with the friendliest user guides I’ve seen. Will their narrow approach draw less heat? Bitcoin and Monero are accepted.” The researcher says that the “White House Market is widely seen as the most secure. PGP is required and they only use Monero. There is no hot wallet, withdrawals are processed once per day. It’s harder to use than Empire was, but many people who take OPSEC seriously vouch for it. 68k active buyers, 1700 vendors.”

The researcher is also careful to note that the Twitter thread is “not an endorsement” for any markets and the “thread is for researchers only.”

The Pirate’s Code

Although the dark web market scene is filled with exit scams, underworld tactics, risk, and the fear of running foul of the authorities, users of dark web marketplaces expect the markets to abide by a code of conduct best described as “honour among thieves”.

This idea originated with the birth of the original and first darknet market, Silk Road. Silk Road was founded by Ross Ulbricht in 2011. Ulbricht called himself "Dread Pirate Roberts" online, in a nod to the 1987 movie The Princess Bride. Ulbricht was interested in libertarian ideas and writing about the goal of Silk Road, he said he wanted to "use economic theory as a means to abolish the use of coercion and aggression amongst mankind. I am creating an economic simulation to give people a first-hand experience of what it would be like to live in a world without the systemic use of force."

In 2013, an IRS investigator working with the DEA to investigate Silk Road was able to connect Ulbricht to the "Dread Pirate Roberts" identity. On August 21, 2014, Ulbricht was charged with money laundering, conspiracy to commit computer hacking, and conspiracy to traffic narcotics. On February 4, 2015, Ulbricht was convicted on all counts after a jury trial. On May 29, 2015, he was sentenced to double life imprisonment plus forty years, without the possibility of parole. He remains in prison today.

Following Ulbricht’s sentencing, many high profile crypto personalities have spoken out in support of Ulbricht, arguing that he was treated unfairly by the legal system. Billionaire venture capitalist Tim Draper supports Ulbricht, and an online petition calling for Ulbricht’s release has over 353,000 signatures.

While Silk Road was only in operation for two years it pioneered the model used by DNMs today. Operating on the dark web, it was run as a Tor hidden service, so that users were able to browse it anonymously and securely. Bitcoin was a primary method of payment.

While there is a slow but growing global trend towards the decriminalization of drugs, the demand for access to illegal drugs has remained steady, even in the face of draconian law enforcement.

Libertarians have argued that darknet markets provide an alternative to the often deadly violence associated with the global drug war, and street drug transactions. Proponents of DNMs argue that buying illegal narcotics from the safety of your home is better than buying them in person from criminals on the street.

If the demand for illegal drugs continues, criminals will continue to be incentivized to meet that demand. In the digital world, the easiest way to meet that demand at scale, is the darknet. The game of cat and mouse continues.


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