Reshuffling the Deck: How Blockchain Businesses in China Died and Survived in 2019
COVID-19 and China
Blocks. Image credit: Christian Fregnan/Unsplash

This article is a part of EqualOcean's 'Blockchain, China's Story' report. Read more about it or download the sample and check out the contents.

China's blockchain scene in 2019 was more or less like a slow recovery after a high fever. Following the general trend in the market of getting rid of scams and turning to real-world applications, recent events confirm that a thorough re-shuffling is happening in the market.

The 'wolves in sheep's clothing' – crypto cheaters that seek to earn quick money – were almost out of the game; to hold on in the hard times, public chain startups that persisted with out-and-out 'decentralization' were striving to improve their capabilities and to explore potential applications beyond Initial Coin Offerings (ICO), while the alliance chain developers – such as Yunphant – were sitting relatively comfortably.

According to research conducted by Interchain, there were over 70 blockchain-related projects of a certain scale that died in 2019, a considerable number of which were crypto exchanges that involved scams, digital wallets and Decentralized Applications (DApps) that used multiple-level marketing, and public chains that did not have a defined business model.

Speculators and scams: gradually out of the game

Among these expired projects, 30% did not surpass six months, and this number added up to 70% for those who did not survive their first year. This suggests a high risk in the blockchain investment market in China. However, instead of saying the primary reason lies in the uncertain business model and applications that most tech-driven startups focus on, rather, it should be seen that the quick money earners, who were essentially committing financial fraud under the name of 'blockchain' and threatening to ruin the entire market, are the ones to blame.

A large portion of those projects that did not survive in 2019 died in the fourth quarter. This result is somewhat unsurprising, given that, after President Xi Jinping called for blockchain to become a focus of national innovation on October 24, the government stepped up efforts to develop blockchain technology – at the same time, Beijing attached great importance to the crackdown on fraudulent projects that made use of the shell concept of 'blockchain.'

If we take a look at these, their scam characteristics tend to be obvious, and it is clear that they are not doing the business that makes the real use of blockchain technology, namely:

1. They tend to be without effective open-source code and a self-developed 'main chain;'

2. They employ multi-level marketing to create Ponzi schemes;

3. They do not disclose the background of the core team members;

4. They use digital tokens as a 'Green Channel' in operating businesses that would require a certain license.

Among them, there is no lack of projects that had been operating for a long time, involving a wide user base and a large amount of money. Examples include YunFuTong – a Shenzhen based digital payment platform, PlusToken, with a ridiculously high yield token wallet – and Bitker, a Shanghai-based exchange that claimed it to be registered in Singapore.

Public chain: striving for applications and users in the winter

In addition to these crypto Ponzi schemes that are gradually being eliminated, there were also some public chain startups that were focusing on developing the bottom layer infrastructure of blockchain that suffered in 2019, and their story is more complicated. Presented as ambitious attempts to take control of 'the entry point to the entire blockchain world,' the projects crowded in this vertical – which was quite trendy in preceding years – failed to satisfy the expectations of the majority of users.

Take aelf blockchain (ELF) as an example. The project, known as the Chinese version of EOS.IO, an enterprise-focused open Operating System (OS) with a multi-chain structure, launched its ICO at the end of 2017, and its community was disbanded in October 2019. From its failure, we could examine the current puzzle of these decentralized infrastructure developers:

1. Hard to find suitable application scenarios: The high costs to operate connected to electricity and labor expenditures lead to limited capacity in processing the transaction volume that real-world scenarios require. Besides, the design of the public chain is not a good match for the complex relationships and business process of real-world cases at present. These are the main pain points in the puzzle.

2. Homogenization and low engagement level among the DApps that runs on the blockchain: A highlight in the white paper of ELF is its multi-sidechain parallel processing approach which allows different side chains to be independent of each other; this can technically improve scalability and does not drain the resources of the main chain and other DApps. Apparently, this function is meant to improve on the insufficiency of Ethereum, which famously had trouble running the CryptoKitties DApp in its peak days.

However, this function is of little value in real terms as phenomenal DApps have not yet appeared. On the one hand, DApps suffer from a lack of recognition among the general population. On the other hand, as the audience of DApps are mostly individual crypto speculators who tend to act in favor of profit-oriented programs. Driven by their need, more and more DApps are crafted in the gambling category, which helps to form a vicious cycle. The issue is also a long-lasting puzzle for Ethereum and EOS.

3. Neither of the current consensuses is suitable for real-world applications based on the current technical capabilities of public chains: ELF employs a Delegated Proof of Work (DPOS) mechanism as consensus, which to some extent combines the traditional Proof of Work (POW) and Proof of Stake (POS). It works akin to 'parliamentary democracy,' where active users vote for 'witnesses' and 'delegates' with placing their tokens (as votes) on the name of their candidate. However, while the system significantly resolves the primary problem of POW – a lack of processing speed and the waste of electricity – it still inherits the drawbacks of POS, i.e. a lack of true decentralization and increased security risk.

Although all the current consensuses cannot support mass real-world applications, decentralization and security are characteristics that a public chain should not easily sacrifice in its development path. In this case, POW still tends to be the trend for public chains to explore and apply.

What to expect for 2020?

The cooling down of the inflated blockchain industry in China in 2019 is actually a favorable condition for those tech-driven companies who are focused on developing infrastructure, industry solutions and real-world applications. When the various relevant parties in the playground return and reexamine the market seriously, responding to the favorable policy environment, the scams in the crypto market are projected to further decrease in the near future.

At the same time, the concentration of the blockchain industry will start to turn from digital tokens to the add-value that blockchain can bring to the real economy. In 2020, it is expected that more and more enterprise-level blockchain applications in the market will emerge, led by the alliance chain-focused tech giants (Ant Financial, Tencent and JD Digits).

Editor: Luke Sheehan
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