What happened 

The cryptocurrency market had a rough week in general, but some of the hardest hit were tokens related to protocols for decentralized storage. The business model involved is new and unproven, and as investors look for safer investments and worry about crypto regulation, the segment is taking a hit. 

Chain (XCN) bore the brunt, having fallen 40.5% in the past week as of 9:00 a.m. ET on Friday. But Filecoin (FIL 7.14%) dropped 23.2% and Arweave (AR 3.69%) declined 13.7%. 

So what 

The broad concern this week was that the decentralized storage protocols don't actually provide a benefit over traditional cloud offerings. Chain has partnerships with sports leagues and even handled some of the Tiffany NFT launch, but it hasn't gotten much traction, and as investors question how many chains are really needed for storage, it has suffered even more than others. 

Filecoin is facing a similar challenge, with investors questioning the token's long-term utility. Arweave is under similar pressure, but it's more widely used, and that's holding up its value. 

Another potential wrench in the works, made more likely by FTX's recent collapse, is pending regulation in the U.S. Lawmakers and regulators are looking to rein in the industry, and uses like file storage may not pass regulatory muster. 

The challenge for file sharing and data storage protocols is that they require a network effect and high valuation to be viable. In other words, if people aren't using their tokens to pay for services, the value of the token itself will collapse. This can create a downward spiral just as rapid as the upward spiral during the bull market. In reality, these services may not be much more useful than standard cloud services, which the industry is finding out the hard way. 

Now what 

Investors are scrutinizing the long-term viability of some crypto business models, even the ones that seem potentially viable. But the real decentralization and stability of some of these networks may not be as strong as originally hoped. 

I think what's happening this week represents the market questioning whether this model even makes sense. There are plenty of cloud providers for all kinds of data, and they're relatively inexpensive to use. Decentralization is a good idea, but it may be tough to pull off in practice.

If users and investors are losing faith, it makes sense that token values are falling. It hasn't helped that the market is down overall. This may be exposing some of the industry's weaknesses. 

Speculating on recovery for most of these tokens isn't a wise move. They may not survive long, and investors should be focusing on the few strong protocols. That's where the money will be made when the crypto winter finally ends.