david goliathFirst, I’d like to define Innovation with a big I, i.e. including business model innovation, perhaps the most difficult kind of innovation to put in place, but arguably the most economically beneficial over the long term, especially when network effects start to give you that added scaling leverage.

In the context of the blockchain, we should always remember that it is really about three intertwined aspects: Technology, Business and Governance.

As a reminder, the blockchain represents an innovative technology with business implications and very challenging legal and governance related ramifications.

Technically, the blockchain looks like a back-end database that maintains a distributed ledger that can be inspected openly or privately by authorized parties. Business-wise, the blockchain is an exchange network for moving transactions, value, assets between peers, without the assistance of intermediaries. Legally speaking, the blockchain validates transactions, replacing previously trusted entities.

In my mind, the biggest payback from blockchain implementations comes when these 3 aspects are working together and in unison. Each time you remove one of these layers, you are dialing down the blockchain’s effects by an order of magnitude.

Let’s assume you are a large company, like a bank for example. Your starting point in “blockchain projects” is the regulated environment, which you can’t escape from. You begin by thinking: “we can’t touch that”. Secondly, comes the inherent business model. Banks know they are a “trusted institution”, and have been with the last 100 years. And they have their own ways of delivering that trust. So, they also think: “we can’t change our business model, because it’s working.”

So, what’s left for banks is the technical aspect of the blockchain, which is its shared distributed ledger capability. What ensues is that anything they do starts to look like another IT project for replacing some databases with permissioned blockchains within the same private networks they’ve been playing in for decades. Of course, they will change a few processes here and there, and cut costs along the way, and these are respectable goals.

But that sounds like business process reengineering, and there is nothing wrong with business process re-engineering. Big companies got busy for a good 10 years throughout the 90’s implementation IT solutions to rethink their processes from the ground up, and that movement was epitomized by the seminal book on that topic, Reengineering the Corporation by James Champy and Michael Hamer.

If you narrow it to a simple analogy, the blockchain replaces the work of two (or several) databases that previously needed to get synchronized via a third party authenticator. Now, the two parties owning that database can sync up directly with each other, bilaterally or multilaterally, but they need to re-write the applications so that they interact with these shared ledgers in addition to the databases. End-users may hardly notice that blockchain technology has been inserted somewhere.

So, in the case of banking, we will probably end-up with a new SWIFT, and it will likely be spearheaded by the R3 technology. To many of us in the startup world, that sounds very boring, on the innovation scale of things. To many other corporate executives and senior managers, that sounds very exciting because the blockchain will generate dozens if not hundreds of multiple projects and opportunities to get busy within the confines of their organizations.

The reality is that banks do not want to change themselves. They just want to improve themselves. As a result, the world will keep moving and changing, and their role will be changed by it, because they aren’t radically changing it themselves.

On the other side of the spectrum, startups live, breathe and thrive on innovation. That is their raison d’etre. And many blockchain startups will start with a clean sheet of paper and dream-up new business models that have no installed user bases to meddle with, no baggage of technologies to integrate with, and no (known) regulatory restrictions to be aware of.

Large organizations have a challenge on their hands when it comes to implementing blockchain technologies. They will most likely start with the low-hanging fruit of process innovation, but can they break free from the grips of their own business models and into the unchartered wild side of blockchain-based business model innovation? It’s a big challenge.

Meanwhile, blockchain startups will continue to innovate and push the boundaries of what the blockchain can enable. I am seeing it right now. The quantity, quality and frequency of blockhain startups is getting better every month, and I am very excited about the prospects of that segment.