After the great bubble of 2011 burst and the price stabilized, the first half of 2012 was rather flat from a speculative point of view. Nevertheless, it was salutary for real economic activity, as then community tried to push the use of Bitcoin as a means of payment, the stated aim of the white paper.

The exchange of goods and services for bitcoins - generally referred to as "trading" - could take place both legally and illegally. Over the period under review, both aspects had been on the increase. On the one hand, the trafficking of illegal goods increased thanks to the flourishing activity of Silk Road, the marketplace nicknamed "the Amazon of drugs", which then accounted for a large proportion of the transactions carried out on the Bitcoin chain. On the other hand, considerable effort was made to highlight more widely accepted business ventures, notably through the growth of the payment processor BitPay.

In this chapter, we will first describe the economic and cultural development of Silk Road in early 2012, which was marked by the appearance of the character Dread Pirate Roberts in Ross Ulbricht's communications. In the second part, we'll analyze how cash exchange has grown as a related activity on Silk Road, thanks to intermediaries such as BitInstant and LocalBitcoins. In the third part, we'll analyze conventional commerce, the emergence of BitPay and the practical application of Bitcoin at PorcFest 2012.

After its initial success in the summer of 2011, the Silk Road marketplace had become profitable and continued to grow. The community was growing, not least thanks to the forum accessible via Tor, which enabled sellers to promote themselves, share experiences and give each other advice. Ross could also express himself freely, and outline his long-term vision for the platform. While Silk Road seemed to be on the right track, Ross's messages were becoming increasingly emphatic, and what started out as a collection of economic players was turning into a real movement.

At the start of 2012, fees followed a flat rate of 6.23%, something that had been helpful in launching the service, but which favored smaller sales to the detriment of larger transactions. For this reason, Ross decided to change the commission system by applying a sliding scale, from 15% for the smallest sales to 3.7% for the largest. He announced this on the forum on January 9, 2012 in a post entitled "State of the Road address" in reference to the solemn addresses regularly delivered by presidents of the United States of America. He justified his decision by sharing his vision; in particular, he explained that Silk Road is "meant to grow into a force to be reckoned with that can challenge the powers that be and at last give people the option to choose freedom over tyranny".

This decision was contested by some, and the Silk Road administrator was accused of greed among other things. But the change was irrevocable. As wrote Ross the next day in the same thread:

The captain's analogy appealed to Silk Road forum members, who were quick to use it both positively and negatively in their messages, so much so that Ross used it to forge a unique image for himself. A month later, he decided to change his name on the forum and in his official communications. Until then, Ross had presented himself under the pseudonym "Silk Road". His new name, unveiled on February 5, was Dread Pirate Roberts (often abbreviated to DPR). This is a reference to the film The Princess Bride, a 1987 comedy parody of medieval fairy tales, in which the character played by Roberts is depicted as a ruthless pirate. The revelation in the film is that the name "Dread Pirate Roberts" is only a title, and that the actual pirate inherited the title from the man who captured him, who himself had inherited the title from his predecessor, etc., the name being supposed to "inspire the necessary fear" in his enemies.

Ross's decision followed the suggestion of one of his closest collaborators, Roger Thomas Clark aka Variety Jones, a Canadian living in the UK who sold large quantities of cannabis seeds on the site (and was also a heavy consumer). Clark approached Ross in November and quickly became his security advisor; Ross even refered to him (https://antilop.cc/sr/exhibits/253456476-Silk-Road-exhibits-GX-240B.pdf) as a "mentor" in his diary. The use of a pseudonym of this type facilitated the transition between two people, or blured the trail of the administrator's identity. This technique would in fact be used in an interview between DPR and Andy Greenberg in August 2013, in which Variety Jones would claim to have succeeded Ross.

The name change confirmed Ross’s status as the leader of the movement that was Silk Road. From then on, he fully expounded his vision of the world in long messages posted on the forum, on subjects as varied as the war on drugs, the Federal Reserve and the minimum wage. He even organized a "DPR's book club", where he recommended books that have inspired him.

Ross's first decision as DPR was to ban the sale of firearms on Silk Road, as these made some Silk Road sellers uncomfortable, and to create a separate platform dedicated to this type of product. The sister platform, named The Armory (not to be confused with Alan Reiner's wallet), opened on February 26, 2012. However, the experiment was short-lived, as it closed in August for lack of sufficient volume.

Activity on the main platform was nonetheless flourishing, contrary to what members of the Bitcoin community imagined, following the example of Vitalik Buterin who, in July 2012, falsely declared that Silk Road "is far from being Bitcoin's economic powerhouse". According to a report by Nicolas Christin, a researcher at Carnegie-Mellon University in Pittsburgh, which would be published in August, the platform was experiencing extraordinary growth. Between March and July, the number of sellers almost doubled from 300 to over 550, and nearly 97.8% of customers left a positive review of their transactions.

Daily sales volume also doubled, rising from 8,000 BTC in March to 15,000 BTC in May, before appearing to fall back to 11,000 BTC in July. This was due to the fact that the price of bitcoin, which had stagnated at around $5 for months, began to rise again over the summer, topping $8 in July. The monthly volume corresponded to record sales of $1.9 million. By comparison, exchange volume on Mt. Gox amounted to almost 60,000 bitcoins at the same time.

As a result, Dread Pirate Roberts' commissions were enormous. From $3,000 a day in March, they rise to over $6,000 a day in July. Over the period measured, they averaged $143,000, corresponding to an annual income of $1.7 million.

All this means that Silk Road occupied a prominent place in the economic activity carried out with cryptocurrency. An a posteriori study would show that the proportion of activity to total activity on the Bitcoin chain oscillated between 10% and 20% throughout 2012. This proportion peaked in February, then again in September 2012, before rapidly dropping below 5%, to the benefit of other activities such as gambling, conventional trading and speculation.

Nicolas Christin's study had a positive effect on the Amazon of drugs. In early November 2012, Ross spoke thus of "explosive growth". He wrote that Silk Road was in "uncharted territory in terms of the number of users accessing Silk Road". Ross could therefore afford to reinvest his earnings significantly in his project: he hired numerous employees to drive the platform forward. Moreover, the Bitcoin exchange rate gradually rose, increasing the purchasing power of holders and boosting traffic on Silk Road.

Silk Road's success was finally attracting competitors. In addition to Black Market Reloaded (which had been open since June 2011), we would see a multitude of other platforms open in 2013, including Sheep Marketplace in February and Atlantis in March 2013. Unfortunately, many of these would end up being exit scams, their managers having a less ethical outlook than libertarian Ross Ulbricht.

Another activity that had been growing steadily throughout 2012 was the exchange between bitcoin and physical cash. This activity made it possible to buy or sell bitcoin completely confidentially, without leaving any trace of a bank transfer. There were plenty of reasons to make this kind of transaction, but the main one was obviously linked to the activity on Silk Road. Buyers could buy bitcoin to obtain drugs; sellers could sell their bitcoins for cash to pay their suppliers and make a living. The same applied to any kind of illicit activity.

One of the first large-scale services to offer cash deposits was BitInstant, run by Charlie Shrem and Gareth Nelson, which added this payment method on December 21, 2011. It was possible for US citizens to deposit banknotes in over 10,000 locations belonging to well-known banking groups (Chase, CitiBank, Bank of America, Wells Fargo), to be credited in dollars on the exchange platform of their choice a few tens of minutes later. Other locations would be added later, including those of supermarket chains Walmart and 7-Eleven. The initial fee was 5%.

The service was an instant hit: in five days, over $30,000 was transferred in this way. In particular, it attracted a certain Robert Faiella, a Floridian plumber in his fifties, who introduced himself under the pseudonym BTCKing. In December, he opened a bitcoin resale service hosted on Silk Road, which operated BitInstant's cash deposit service. He supplied bitcoins directly to buyers and charges an additional fee for his work.

BitInstant and its intermediary (TrustCash) quickly noticed BTCKing's activity, as several mistakes were made by its customers when making deposits. In particular, one deposit exceeded the $1,000 limit set by the company, causing its first account to be closed. Having understood what BTCKing was doing, and aware that he "brings us a lot of business", Charlie Shrem contacted him personally, advising him to proceed with deposits using another e-mail address. But this arrangement didn't sit well with co-founder Gareth Nelson, who took a dim view of the business. In a discussion with the latter in January 2012, Charlie justified his choice as follows:

BTCKing's business was a major boon for BitInstant, so much so that Charlie gave him a commission discount after a few months. In August and September 2012, BTCKing's sales amount to $40,000 per week. BitInstant was therefore intrinsically linked to Silk Road, as were all the exchange platforms of the time, including the notorious Mt. Gox.

Cash deposits weren't the only way to exchange dollars and bitcoins; there was also peer-to-peer exchange services. In particular, these platforms allowed people to get in touch with each other in order to carry out an exchange in person. They have been appearing since 2011 with platforms such as Bitcoin.local (Tradebitcoin.com) or BTC NEAR ME. But the main one was LocalBitcoins, which was created in June 2012 by an individual named Jeremias Kangas.

Jeremias Kangas was a Finnish programmer and hacker in his early thirties. He ran the company Kangas Bros. Innovations Oy with his younger brother, Nikolaus, with whom they published a number of iPhone and web applications. He heard about Bitcoin in late 2010 through Hacker News, and was immediately fascinated by Nakamoto's model, which he described as "a great and crazy innovation" and "a revolutionary concept". In 2011, after a trip to India, he started working full-time on Bitcoin and developed several programs such as the software implementation django-bitcoin or the custodial application Easywallet.org. He also developed the Acceptbit online payment processor with Stefan Thomas during a hackathon, a solution that took advantage of Electrum's master public key functionality to generate new addresses without having to access the corresponding private key.

On May 22, he remarked on the Bitcoin forum that "cash exchange sites already exist" but that "they suck", and that "when there isn't a good business model, you get crappy sites"). That's why he decided to develop his own matchmaking platform, with the help of his brother. The platform, called LocalBitcoins, was launched on June 7. It was accompanied by a guide, which explained how to become a cash changer.

During the summer, the two brothers integrated an escrow system into the platform: bitcoins were held by the platform and could be unlocked by SMS to be paid out to the buyer once the seller had acknowledged receipt of the cash. They also allowed sellers to link their profile to an account on #bitcoin-otc, the over-the-counter IRC channel opened in 2010. Over time, people would also use the platform for bank transfer exchanges.

LocalBitcoins was attracting community attention, with Jeremias participating in several conferences including Assembly Summer 2012 and the Bitcoin conference in London. By September, there were changemakers in 74 different countries and over 300 cities. On June 14, 2013, one year after its creation, the site would have around 44,000 users, and the daily exchange volume would reach several tens of thousands of dollars!

While Silk Road traffic and cash exchange were flourishing, so was conventional trade. In 2012, hundreds of merchants were referenced on the Bitcoin wiki. Although there were some brick-and-mortar stores (usually bars and restaurants in major cities, such as the iconic Room77 in Berlin), most bitcoin purchases were made online.

Large online shops thus prospered over the course of the year. Such was the case of Coinabul, a gold and silver sales service in the USA, opened in October 2011 by Jay Shore and Jon Holmquist. In just a few months, the platform attracted many customers, exceeding 6,000 bitcoins in monthly volume in April 2012 ($30,000 at that time), with a total volume of 120,000 bitcoins in October. Also worth mentioning was Bitmit.net, dubbed the "eBay of bitcoin", a marketplace allowing individuals to put items up for sale or auction, which was launched in September 2011 by a German calling himself Tosaki.

This growth in commerce made it necessary to standardize the payment process, so that all wallets can be compatible with each other. Using a smartphone and reading a QR code through its camera made payment hassle-free. However, it was necessary to agree on the data to be included in the QR code: this was why a URI scheme was being developed to formalize payment requests. According to this scheme, a request will, for example, take the form bitcoin:175tWpb8K1S7NmH4Zx6rewF9WQrcZv245W?amount=20.3&label=Luke-Jr, and thus contain the recipient's address (175tWp...), the amount to be paid (20.3 bitcoins) and the transaction description (Luke-Jr).

The use of this type of scheme was suggested as early as February 2010, and approved by Satoshi Nakamoto itself. A standard scheme was drafted by Nils Schneider in January 2011, and completed by Luke-Jr to give BIP 20.

In January 2012, this earlier work was taken up by Matt Corallo to take final form within BIP 21. The latter standard was adopted by the community over the course of the year, notably by BitPay in June. It was finally registered with the Internet Assigned Numbers Authority (IANA) in September 2012, by Dave Thaler, then working as a software architect for Microsoft Research.

Commercial growth also called for the creation of tools that would allow receiving bitcoin simple and straightforward. Merchant services such as BitWillet and Bitcoin.com (developed by exchange platform Tradehill) were launched in 2011. But the main service to emerge during this period was the BitPay payment processor.

BitPay was the first bitcoin payment processor worthy of the name. It was conceived in the summer of 2011 by Stephen Pair and Tony Gallippi, two American friends approaching 40. The two men met some twenty years earlier at the Georgia Institute of Technology, from which they graduated in 1994.

Stephen Pair, or Steve on the forum, worked for IBM as a software engineer and development manager. Passionate about cryptography, he became interested in David Chaum's eCash model in the 90s, then in Linden Dollars and Ripple. He became enthusiastic about bitcoins in early 2011, and mined some with his graphics cards before realizing that it would have been more profitable to buy them.

Tony Gallippi, aka Tonygal, meanwhile, had worked in sales and marketing in the robotics and finance sectors. In 2011, he edited an online adult magazine called STARE Magazine. Stephen told him about Bitcoin in February and he sought to accept the cryptocurrency with his business in May.

Together, they develop a payment processor called BitPay, which they initially spell Bit-Pay. Stephen took care of the technical side and Tony of the business side. They tested the software in early July 2011, deploying it for the sale of STARE Magazine.

The principle behind BitPay was to give merchants the option of accepting payments in bitcoins and instantly converting them into dollars, so that they can hedge against volatility. The business model was thus the opposite of BitInstant: BitPay advanced the dollars to their customers against a commission (processing fees are 1% in total), and took care of selling the bitcoins later. The founders' aim was to facilitate the use of Bitcoin as a means of payment to counteract the oligopoly of the Visa and Mastercard networks. The advantages, listed in early 2012 on the company's website, were as follows: "NO RISK of Chargebacks or Indentity Theft. NO HASSLE of PCI Compliance. NO BORDERS Accept a payment from ANY country". Vitalik Buterin considered that BitPay was "one of the most significant innovations for Bitcoin businesses".

Stephen Pair and Tony Gallippi launched their beta service at the end of July 2011, and started promoting it rather aggressively! They appeared on Bruce Wagner's Bitcoin Show on July 27, and went to the New York conference at the end of August. From September onwards, they made promotional videos, of which the first was a parody of a PayPal ad (with attractive women). Tony Gallippi gave a presentation on the adoption of Bitcoin at the Prague conference in November. Finally, in December, they launched an initiative called LoveBitcoin.org, "advertising the usability of Bitcoins as an alternative to PayPal, debit cards, Western Union, and wire transfers".

In January 2012, they participated in the Consumer Electronics Show in Las Vegas, the largest trade show dedicated to technological innovation in consumer electronics, and occupied a booth there with Roger Ver. They also launched new products, such as the deposit card which "lets anyone receive bitcoins without a wallet or without having to know anything about bitcoins"; or Limocoin, "a bitcoin payment system designed for limousine and cab drivers and businesses".

Throughout 2012, their service was expanding. It expanded internationally, in North America and Europe. The number of merchants registered on the platform increased from 100 in March to over 1,000 in September. Monthly transaction volume jumped from $10,000 in March to $550,000 in September, with a daily peak of $250,000 on June 24 driven by the pre-sale of Butterfly Labs' ASIC.

BitPay's success was being emulated, with the appearance of payment processors WalletBit, Paysius and AcceptBit. But it would be challenged above all by the Coinbase service, launched earlier this year by a certain Brian Armstrong, who we'll be talking about in the next lesson.

A major event in the commercial adoption of Bitcoin was the 2012 Porcupine Freedom Festival, which took place from June 18 to 24, again at the same campground in upstate New Hampshire. That year, participants could reserve their tickets in bitcoins. The festival gathered almost 1,000 people.

Representatives from BitInstant were present to honor Bitcoin. There were four of them: Roger Ver (accompanied by his Japanese fiancée, Ayaka), Erik Voorhees, Charlie Shrem and Ira Miller. They were responsible for explaining Bitcoin to the others, and organized a round-table discussion on the subject that attracted over 80 people. On the media front, Roger and Erik answered questions from the few independent media present, and appeared on the Free Talk Live radio show, among others.

But most importantly, BitInstant members were manning a booth, called "Bernanke's Bitcoin Exchange", where they handled exchanges with the dollar and taught the curious how to use Bitcoin. They showed people how to easily accept and spend bitcoin using BitcoinSpinner, Blockchain.info or Instawallet. Over the course of the week, they sold $2,500 worth of bitcoins, and a few hundred dollars worth of Casascius Coins, of interest to numismatic enthusiasts.

Their stand was located on the part of the grounds called the Agora Valley, an area reserved for trade that included around forty listed stalls. Vendors offered everything from food and drink to books, clothes, knives, hats and much more. As in previous editions, merchants generally accepted silver and copper coins as means of payment, as well as dollars (or "Federal Reserve Notes" as they call them). But that year, more than half of them also accepted bitcoin. With the help of BitInstant, this percentage climbed to 80% by the end of the event.

In particular, a certain George Mandrik, a libertarian of Greek origin, offered for sale gyros (Greek sandwiches akin to doner kebab) and baklava (traditional oriental desserts), as well as paleo pancakes baked in coconut oil. He made a lot of sales thanks to a BitPay deposit card, which attracted the attention of Tony Gallippi. Thanks to this involvement, Mandrik was later hired by BitInstant to manage customer service.

The introduction of bitcoin at PorcFest was a huge success. Josh Harvey (aka Ben-Abuya on the forum) talked about the 2012 edition as "Biggest Bitcoin event ever". He wrote: "I believe this was the biggest experiment in person-to-person bitcoin usage to date". Charlie Shrem commented that it was the best weekend of his life.

Following this event, the relationship between Bitcoin and the libertarian sphere became fused. BitPay sponsored the Paul Festival, a music festival held in Florida in August (a few days before the Republican National Convention), in tribute to Ron Paul. The following year, PorcFest would be more dedicated to Bitcoin.

While economic activity had largely been dominated by drug trafficking on Silk Road and associated currency exchange operations, it had gradually diversified to include more and more conventional merchants. In late 2012, we saw this trend clearly emerge when WordPress, the world's largest website host, began accepting bitcoin payments via BitPay. Bitcoin suddenly gained legitimacy with the public.

This event thus paved the way for wider acceptance, which notably resulted in doubling the number of BitPay merchants in just a few months. In March 2013, the volume exchanged via the payment processor even surpassed that of Silk Road, thanks in particular to the activity of Bitcoin Store, Roger Ver's online store opened in November 2012, and Avalon Labs, the ASIC manufacturing company launched by a certain Yifu Guo.

Despite this gradual evolution, the period remained linked to the Wild West and was also illustrated by the great success of cryptocurrency gambling and by sex workers' first experiments with Bitcoin. The short chapter that follows is devoted to this ‘vice currency’ role that Bitcoin took on from that point onward.