Critical paths to sustain blockchain growth

A new CUHK study examines how blockchain platforms evolve and how the market shapes their growth and stability, offering answers to the hype cycles

By Ellis Ng

Blockchain technology has emerged as a transformative force in the digital economy, with cryptocurrencies like Bitcoin and Ethereum becoming household names. The past few years have also seen cryptocurrency bubbles burst into a crash, yet many survive and get stronger.

In mid-November, the value of Bitcoin reached record highs of around US$92,000 as part of the latest rally in cryptocurrencies and growing mainstream adoption. The rise comes as major trading platforms report millions of new users and the crypto market value hit a record US$3.2 trillion valuation, though the sector remains volatile and unpredictable.

“Blockchains came to the world as a novel technology and rapidly attracted an industry built around it,” says Li Tianyi, Assistant Professor at the Department of Decisions, Operations and Technology of the Chinese University of Hong Kong (CUHK) Business School. “Emerging technologies hold promises while often undergoing hype cycles of their utility.”

In a recent study titled Development trajectory of blockchain platforms: The role of multirole, Professor Li and the Wei Lun Professor of Business Artificial Intelligence at the same department, Michael Zhang, revealed how blockchain has enabled participants to act simultaneously as users, investors and labours, which engenders complex dynamics of the system that have influenced platform development.

Professor Li and Professor Zhang’s research analysed over 100 blockchain token price series and developed a novel model to explain platform development patterns. It suggested that the success of platforms is dependent on how well these roles of platform participants are balanced, with different roles dominating at different stages of platform development.

The research found that blockchain platforms demonstrate a three-phase development trajectory, characterised by the relative dominance of participants’ different roles. By studying the price data of platform tokens, the researchers created an effective parametric model that could be used to predict and explain how platforms grow.

Their model outperforms traditional scaling models in predicting network growth and is extended to analyse “forking”, those events in which blockchain platforms branch into competing versions. The creation of Bitcoin Cash in 2017 from a hard fork of Bitcoin, as well as Ethereum Classic and Ethereum from a 2016 hard fork, are prominent examples.

Professor Li and Professor Zhang’s findings suggest that the timing of a fork matters more than the size of the split. Counterintuitively, these splits can help the original platform by increasing its visibility in the market.

Moving from chaos to stability

The study shows that the initial phase of a blockchain platform begins with a small, dedicated community of labourers, which refers to participants who contribute to a blockchain ecosystem by performing various digital work, including supporting the blockchain’s operation, maintenance, and development. The second phase marks rapid growth driven by investment activities. A mature blockchain platform will then settle into stable market cycles.

“Blockchains came to the world as a novel technology and rapidly attracted an industry built around it. Emerging technologies hold promises while often undergoing hype cycles of their utility.”

Professor Li Tianyi

“In this trajectory, the beginning stage of the platform is characterised by intense labouring activities within a small participant group, the intermediate stage is characterised by increasing investment activities that rapidly boost the platform’s population base, and the mature stage is characterised by recurrent market oscillations between a high and a low participation mode,” says Professor Li.

Early participants are attracted by high labour rewards. For instance, blockchain miners receive block rewards for successfully mining new blocks, and the increasing value of the platform’s native tokens gains significant returns, among others. However, these rewards often decline quickly as more people enter the network. The platform then enters a stable, predictable development, with user numbers rising and falling in cycles that affect its value and use.

This phase will often set the foundation for later growth to the next phase, as investment takes centre stage. When a platform grows, it creates price differences that traders can profit from, making investment opportunities more attractive and turning many investors into active participants.

User numbers grow in waves, hitting new highs with each cycle, and the increased visibility draws in even more participants who find practical uses for the platform. Eventually, when joining offers fewer benefits, user growth slows down and stops. Rather than reaching higher peaks, user numbers rise and fall in stable patterns.

The study also found that two factors—the time delay in quitting the platform and the holding time of platform tokens—were particularly crucial in differentiating successful platforms from failing ones. A larger time delay indicated higher trust in the platform and higher switching costs, leading to more user “stickiness”, the research noted. Meanwhile, the longer an investor holds a token, the lower its price volatility or transaction velocity, which translates to more investment stability.

Engagement is king

Platforms need to effectively engage all three participation roles — users, who utilise the platform’s services, investors, who create the financial landscape, and labourers, who maintain the network — to achieve sustainable growth, the researchers suggested.

In the early stage, labourers — like miners or validators – are crucial in building the foundation. During the growth phase, investors drive rapid expansion, with regular users keeping the platform stable as it matures.

The research also showed that platforms supporting all three roles were resilient and showed better development trajectories than those focused on fewer roles. When one role becomes less active, others can help maintain a platform momentum.

“We hope that this study can bring some utility to different stakeholders interested in blockchains,” says Professor Li. One concrete application of this model could be in decision-support simulations to assist blockchain entrepreneurs with platform design and early-warning detection. The model can also aid in strategic investment analysis and regulatory policymaking, according to Professor Li and Professor Zhangy.

As blockchain technology continues to evolve and new platforms emerge, Professor Li hopes these findings will help stakeholders better understand and manage platform development.

“This model provides a ground for analysing the profitability of participants’ activities on tokenised platforms, [meaning] platforms with blockchain implementation, through their token investment and crypto labouring,” Professor Li says. Furthermore, he and Professor Zhang plan to extend the model to discuss the earnings on the platform and people’s strategic participation that maximises the earnings.