The Blockchain and The Innovation Decoy

In my work launching new products in big companies I’ve seen that the real reason many huge companies publicly celebrate innovation is to avoid having to actually innovate. Because the hard part of intrapreneurship is rarely that the technology is too complex, or the user flow indecipherable, or the unmet market need opaque. The hard part is that someone in the organisation thinks they’re doing it already. Even if your project is mission critical and your results are indispensable that person will still try to thwart you.

The Innovation Decoy

Real innovation would require the CEO to walk down the hall and say to another executive who they’ve golfed with every weekend for twenty years, “I need you to not get in the way of this new initiative.”

Most CEOs do everything they can to avoid that difficult conversation. So instead they build a self-driving, artificially intelligent VR headset built on the blockchain and invite the media to fawn over it. Meanwhile the rest of their company plods along, untouched by modernity.

It’s a dangerous trap. It is why many of the companies which ostensibly make the greatest leaps and bounds with new technology are often disrupted by it. A change in the power dynamic of a huge company is much harder to make than the celebration of new technology.

The Blockchain Decoy

This leads me to the blockchain. The Fortune 500 has inundated us with white papers, keynotes, TED talks, and podcasts about how the blockchain will revolutionize and transform. But what these companies haven’t really done is actually use the blockchain. At least not in a structurally significant way. It’s part of a familiar pattern: celebrate the technology with such gusto that no one notices that you don’t actually use it.

This is a dangerous, high risk mistake with the blockchain. Because if you’re in the Fortune 500 and you don’t capitalize on the power of the blockchain – its power will be used against you.

Anyone who’s ever tried to launch a new product in banking, insurance, or consumer packaged goods has probably been hobbled at some point because “the logistics for distribution can’t scale,” “compliance isn’t traceable,” and “the supply chain is too complex.”

The blockchain is the ladder that can get over these obstacles. The blockchain takes all of the functions historically reserved for Fortune 500 operations, compliance, and purchasing departments, and decentralises them. It builds them into the workflow, and makes it more transparent and efficient. That’s not to diminish the complexity of the blockchain. Scale, code, and user experience are undeniably hard. And while the blockchain’s utility is promising there is still a lot of work to be done before it’s actually used at scale.

However, these challenges are becoming easier to overcome. And as this continues the barriers to entry in many previously impenetrable industries will collapse. More specifically, complex supply chains, distribution networks, and regulatory requirements will no longer prevent new entrants from stealing market share from the largest incumbents.

There is a lot of hard work that large companies need to do with the blockchain before it actually impacts their business in the way their whitepapers claim it can.

Make sure everyone who needs it can use it

Two promising functions of the blockchain are proof of ownership and proof of work. With the blockchain, when someone says they did something, or that they own something, multiple parties inside a network create a unique digital record confirming that they’re telling the truth. If at any point the digital information underlying that unique digital record changes then it will break the code and break the chain. The digital string of records will identify a problem and be able to isolate the exact root cause of that problem.

Sort of….

The reality of the blockchain is that it’s an improvement for verification and traceability – but there’s still plenty of room for opportunism.

One of its biggest weaknesses is that in any blockchain the people who are required to verify that someone did what they said usually don’t know how to write the code to prove it. And they also don’t have a computer that can autogenerate the necessary code. So they hire someone who can create the verification record (or more accurately they hire someone to create a programme that autogenerates the record, and receives confirmation from other computers that no one lied and the record is correct.) That handoff – between the person who has the domain expertise to verify that everyone’s telling the truth, and the person with the technical expertise to write the code that proves it – is inherently porous. Its weakness is that the people verifying the work might lie to the people creating the code.

For example, let’s imagine that a crate of coffee is loaded onto a shipping container in Vietnam, from there it sails to Singapore for quality control, and is then roasted and packaged in New Delhi. Along the way the person in Singapore digitally signs off on the work from the people in New Delhi, who sign off on the quality of the work in Vietnam. If this chain of authorization is performed in the blockchain then each person has to tell a technical intermediary what they have done. That intermediary must take that person at their word and then write (or autogenerate) the code confirming that the other person didn’t lie.

The problem here is a human problem – not a technical one. It matters enormously that the person who confirms that the work was done has a real incentive not to lie. For example, if the blockchain had existed during the subprime mortgage boom it wouldn’t have prevented the financial crisis. The borrowers, lenders, and investment banks that packaged the loans into mortgage backed securities all had an incentive to lie in order to keep the bubble inflated. In the same way that it wasn’t hard for them to pay ratings agencies, politicians, and regulators to stay out of the way – they could pay software developers to write rubber-stamp code confirming that everyone is behaving with integrity.

It’s about as trustworthy as an invitation-only chain of Notary Publics each taking their clients at their word and providing a series of digital stamps along the way. The key difference with the blockchain is that when everything blows up it’s much easier to trace it back to exactly when and where the flaw was introduced into the chain. But it doesn’t inherently solve the problem of dishonesty.

And another thing…

The other (and arguably harder) problem is that the compliance, operations, and quality control executives who currently oversee and control the supply chain inevitably try to thwart the blockchain. Either because they are too proud to admit that their supply chain needs improvement, or because they are actually cheating and will get caught, or because they’re alarmed by how unproven the technology is. The blockchain doesn’t eliminate the need to understand why people cheat or condone mediocrity. The companies that can’t have the difficult conversation about the need for change run the risk of entrenching bad infrastructure with the blockchain.

Put another way, the blockchain is a powerful tool. It is not a shiny toy. The large companies that celebrate it publicly without using it privately risk falling victim to its power.