The global cryptocurrency market has already seen more than USD 706 billion of its total market capitalization evaporate since hitting a peak in early January, according to research site CoinMarketCap, and those losses appear to be triggering a shakeout in the wider blockchain community in China. Many startups there are finding it increasingly difficult to gain access to capital as investors grow skeptical of the fundamental claims around digital currencies and the blockchain technology that underpins them.

With visions of a decentralized new world order, many blockchain ventures had been touting themselves with the promise of new disruptive applications that would upend industries and revolutionize economies. But in hindsight, many of those startups were either exaggerating their potential benefits or the time that would be required to achieve them.

"It is a period of disillusionment. As much as I am a believer in the long term disruptive power of blockchain, it cannot solve all the problems in the world," says Bonnie Cheung, a venture partner at 500 Startups. "You don't know how many times we have read proposals that claimed to solve all pain points for almost every industry."

But ten years after the publication of Satoshi Nakamoto's famous white paper that gave birth to the blockchain concept, there are still no killer apps or transformational platforms in terms of real-world use cases of blockchain. Even the most mature application of payment – in the form of cryptocurrencies – appears to be losing some ground. The use of bitcoin in transactions handled by major payment processors dropped nearly 80% in the year up to September, according to Chainalysis.

"What has been reported by the media that around 40% of blockchain projects have shut down is too conservative," says He Ning, chief operating officer of QOS, a venture that aims to create the infrastructure for large-scale commercial uses of blockchain.

"For any industry, around 20% of startups should fail when the sector's market value drops 10%. With the kind of market collapse the crypto market has seen lately, almost all speculators have left, but that's far from enough. I feel it takes around getting rid of 99% of crypto exchanges and unrealistic projects for a new wave of bull market to arrive," he says.

To be sure, even as faith in blockchain ventures has been on the wane in China and industry participants have either departed the industry or are preparing to do so, there are still others who have been wading in with aims to cash in on the crash, and some of the earliest adopters are even celebrating what they see as a healthy shakeout of the industry.

"The blockchain industry has flushed out some poor-quality projects, and the entry barrier to the industry has increased, which is beneficial to the sector's future growth," said Hubery Yuming Yuan, CEO of Huobi China, who left brokerage firm Industrial Securities to join Huobi in March. "The (crypto) bubble burst has led to a more rationalized industry, and we have seen more practical attempts at blockchain applications."

Yuan believes that many strong projects are continuing their development work and have not been impacted by the market's downturns. "Solid public blockchain projects and numerous popular decentralized apps are gaining momentum," he says. "Chinese enterprises and conglomerates continue to explore new blockchain use cases."

It is increasingly clear that the bear market in cryptocurrencies has accentuated a market bifurcation.

"Only a few projects – most likely those under big institutions - will eventually do well. Ultimately, it's winner takes all," says Xinghua Luo, cofounder of BBShares, a hedge fund offering index funds in crypto assets. Luo is among those who are continuing to bet on the long-term future of cryptocurrency as an alternative asset class that eventually will be incorporated in most investment portfolios.

If the future of blockchain is "winner takes all" and a concentration of success by a few of China's top players, what does it mean to one of blockchain's fundamental promise of decentralization?

The prospects of blockchain applications have become narrower, and more people are starting to suggest that China's blockchain ecosystem will eventually need to function mostly within a centralized structure. And the recent buzz around security token offerings (STO) represents a new form of token offering that exemplifies this because it actually complies with existing legal frameworks.

Earlier this month, an investor and cofounder of a Chinese blockchain project staged a dramatic departure. Yang Ning of CDC, a smart contract platform aiming to build a decentralized global consumer data asset exchange on the blockchain, blasted the entire industry in a media interview, while proclaiming that blockchain's future can only exist under a centralized legal structure. For example, programs that would fall under the authority of China's Ministry of Industry and Information Technology.

Yang's case is somewhat emblematic of the dilemma faced by the blockchain community, and that is centralization happens quite naturally in many markets. Bitcoin, the largest of the cryptocurrencies, has seen a significant level of centralization in its mining, asset holding and computing power distribution. Bitmain Technologies is said to have approximately 42% control of the bitcoin network hashrate -- a measure of the computing power dedicated to mining the digital currency. It is also the largest producer of bitcoin mining machines, and operates the largest bitcoin mining pools.

Moreover, blockchain's real-world use cases are showing signs of becoming more narrowly defined. "Unlike steam engines, electricity, computers, artificial intelligence and quantum computing, blockchain is not a productivity revolution," Huobi's Yuan said. "Blockchain is similar to printing, papermaking, and the internet. It can liberate productivity even though perhaps it does not represent a fundamental technology breakthrough."

While the markets look likely to remain volatile, blockchain investors find themselves facing unexpected challenges. For 500 Startups' Bonnie Cheung, even success in blockchain could mean tricky problems. For instance, how to exit from truly distributed systems that generates huge revenues, but are difficult to sell as an asset?

"How do you convert an investment that started as a venture deal to something that ended up almost like a bond? Can you lend that bond? These are all interesting questions that will need to be answered in the future," says Cheung.

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