When someone mentions blockchain, people often still tend to think about cryptocurrencies, bitcoin, finance, and open-source data. Yet, blockchain is more than just this. It’s an enabler of fruitful discussions. Moreover, blockchain drives the development of innovation capabilities and helps prepare your company for the future. To be able to see this, we should view the definition of blockchain in a different light. When you do that, a whole new range of game-changing opportunities will open up for you.
That’s why in this article, we’ll show you that placing too much emphasis on finding and seizing the disruptive potential of blockchain leads to disappointment. Many established companies have experiences with blockchain and with very mixed results. The technology seems quite complex, yet it has the potential to add value if the right value drivers are identified. However, it’s easier said than done as it concerns a new way of organizing for incumbent firms.
What’s blockchain and what’s DLT?
One of the main obstacles has been a lack of definition. Blockchain is not well-defined because it’s a container term that needs additional clarification. Especially when considering ‘blockchain for business’—a context in which the technology is being applied and implemented more and more.
Let’s start with that and focus on blockchain as:
#1 A conversation starter.
#2 A driver for new ways of organizing.
#3 A reflective learning tool for incumbent firms in the financial services industry and beyond.
These insights were gained from our own two-year study on blockchain in the financial services industry, which we shall share with you later in time. Before continuing, we should clarify that instead of ‘blockchain’, the concept of Distributed Ledger Technology—or DLT—was used in the research. Distributed Ledger Technology (DLT) is the overarching technology of which blockchain is one of its applications.
Companies have been exploring both DLT and blockchain over the past five years. First, organizations needed to understand what DLT is. They were eager to explore opportunities with this novel technology. That’s why from 2017 onwards, many established financial companies have shifted their internal exploration focus toward practical implementations of DLT.
In the Netherlands, all major financial institutions became a member of the Dutch Blockchain Coalition (DBC). The DBC is a jointly developed partnership by the Dutch Government, research institutions, and organizations with the aim to support blockchain developments in the Netherlands. This initiative supported the established firms in getting in touch with each other, to share insights and learn about best practices.
Second, to prepare for a successful DLT implementation, you must adjust your organization’s internal structures and systems. Our research shows the impact of the collaborative nature of DLT, which we’ll further explain in the second article of our blockchain series.
The biggest takeaway we’ve learned over the past years is that the above-mentioned lessons have to be included when defining blockchain. That’s why we’ll focus in this article on ‘blockchain as a technology’ and elaborate on three new visions that see blockchain as more than a technology. In our view, it’s a vital addition to prevent unclarities when discussing the use and possible benefits of blockchain.
Blockchain as a technology
Looking at blockchain as a technology is the most common way to define it. The terms ‘blockchain’, ‘blockchain technology’, and ‘DLT’ (distributed ledger technology) are often used interchangeably. These concepts have, however, very different meanings and applications.
When discussing blockchain, we believe it’s important to set out a clear definition to prevent unnecessary discussion, potentially leading to conflict. ‘What type of blockchain are we considering exactly?’ is, therefore, a fixed element of our explanation.
Figure 1 shows an overview of how DLT—as a type of technology—relates to technologies and applications of these technologies. It shows that the overarching concept is DLT. Blockchain is a type of technology and could also be considered as the open or ‘unpermissioned’ variant of DLT. Bitcoin is an application of blockchain technology. Be aware that both open and closed DLTs exist.
Open DLT applications are used most by organizations and within socio-economic environments with established trust in third parties. There is no direct need to disrupt trusted third parties. However, variants of open-source innovation can be applied to make processes more efficient and cut costs (see below, for example).
Hence, in a business context permissioned or closed ledgers are discussed. Permissioned implies that this application of DLT is only accessible to a certain number of members of the network. This is within organizations, at least within the Netherlands, the most common approach.
Almost all DLT applications within enterprises are closed, permissioned ledgers. In these cases, the participants that look for sharing ‘one shared truth’ are agreed upon upfront. To form such a network of participants, you’ll need to take multiple steps. This is not easy to set up, as a range of things, such as governance and business model innovation, need to be clarified and arranged upfront. This will also be addressed in the second article of our blockchain series.
There are applications of either ‘permissioned’ or ‘permissionless technologies’. The most famous example of an open-source, permissionless blockchain application is bitcoin. Examples of permissioned DLT are currently most commonly found in trade-finance (Komgo and Vakt) or within the supply chain.
In these areas, the reason to apply open DLT was the clearest option. Multiple parties from different geographical areas collaborate for one shared goal. Trust issues exist due to the inability to see and meet the other parties. In addition, the trade finance industry was mostly still paper-based. DLT, therefore, also offered a way to digitalize the industry.
To explain how DLT applications went from discovery to implementation, we’ll elaborate on how it all started. The first perspective we apply on blockchain is, therefore, the role it played as a conversation starter.
Vision #1. Blockchain as a conversation starter
When zooming in on our blockchain explorations of the past two years, it has become clear to us that blockchain is a great conversation starter. And not just in a business context. The word ‘blockchain’ sparks interest. People will respond! Some may give a somewhat annoyed response because they argue it will never work in reality. But, at least you caught their attention.
So, if you want to move beyond discussing the societal and political implications, people should understand what the implications are from a business perspective.
People in larger financial firms involved in DLT projects and innovation labs are by nature eager to learn, is what we observed. This can be explained by the complex nature of the technology. It can take quite some time and study before you start to fully understand it. The energy of the people involved is crucial as the implementation of innovative solutions takes persistence and effort.
Equally important, you need to give stakeholders at multiple levels an explanation of the implications and opportunities of the technology. Technologies emerge faster than people can adapt to them, which makes it difficult to keep up.
“To prepare for a successful DLT implementation, you must adjust your organization’s internal structures and systems.”
Often, people tend to think they understand a novel technology. What really happens, though, is that they’ve heard about the term before and, therefore, start to recognize it. ‘Recognizing’ is a step in the right direction, of course, but that’s not at all the same as thoroughly understanding it. Be wary of that.
When considering the just-described phenomenon, the immense buzz that has been created in the media around blockchain, bitcoin, and cryptocurrencies, should be perceived as something positive. Even if board members, senior management, and employees did not understand what blockchain was, they were at least trying because they sensed it had to be something important.
If you spot any blockchain opportunities within your organization, make sure to start by creating momentum. Build a narrative around the topic by sharing your story within and outside of the firm. Use blockchain’s collaborative nature as an advantage. Incumbents are namely looking more and more at how to create value with innovation ecosystems. Building collaborative capabilities is therefore a valuable step to becoming more future-proof.
So, start the conversation and move toward understanding the actual pain points. Why did blockchain not serve as the right technology to solve your organization’s problems? What are the actual bottlenecks? What does the organization need to move forward? Look for distinct value drivers and identify if DLT is the best fit. If not, reflect and get a grip on the lessons learned.
Vision #2. Blockchain as a driver for new ways of organizing
Another way to look at blockchain is by defining DLT as a new way of organizing. In its essence, that’s what the technology can offer to you and your organization: sharing data with other parties while being able to encrypt the data. This implies that the shared data can be used for a common goal, however, different parties don’t have to get access to see all the data that is being shared.
As mentioned, use cases are commonly found within trade finance because of the cross-border interaction between parties. Within a single country, examples can be found if there is value in sharing data for a common goal, without showing each other the data.
Consider the development of an algorithm to detect fraud or criminal behavior. Data of multiple banks are combined as it leads to more data points. This enables better training of algorithms that can help banks in achieving individual and shared goals at the same time. A shared goal to achieve common value should be able to be retrieved from the solution because otherwise there would be no point in collaborating.
To be optimally prepared for such collaborative technologies, such as DLT, you must reconsider your internal structures, systems, and ways of working. Due to the inter-company nature of technology, organizations need to learn how to open up, despite that collaboration with other banks has always presented various obstacles.
“You could say that to build valuable solutions for end-customers in this age, collaboration is a must.”
Insights derived from our DLT study referenced earlier, show that the level of understanding of DLT differs per firm. This is caused by a (lack of an) innovation strategy, innovation capabilities, and (agile) ways of working. Also, the inabilities to recognize what capabilities are needed to implement DLT or any other type of platform play a role.
Innovation tensions, therefore, need to be managed at multiple levels. Both within and outside of the firm, as figure 2 illustrates. A new playing field has emerged, in which banks are not only internally focusing on innovation, but also engaging external stakeholders such as the Dutch Blockchain Coalition (DBC). In addition, they also look at fintechs and work with consultancies to ensure that they capture the right knowledge at the right time.
A new dimension has been added since the emergence of DLT and that is collaborating with competitors. To be optimally prepared for platform technologies while exploring DLT, you need to identify which innovation capabilities your organization lacks and needs to develop. This is easier said than done, as innovation tensions occur on multiple levels.
Vision #3. Blockchain as a reflective learning tool for incumbent firms
As technologies emerge fast, matching new technological trends and concepts to the established order within incumbents often leads to disbelief in the potential of a novel technology. Especially in the financial services industry, a risk-averse environment with rigid organizational structures, and generally a lack of innovative culture, people’s disbelief in the potential of DLT is perceived as low.
It is even argued that blockchain applications will not work because their complexity is an insurmountable barrier. Moreover, incumbents are not ready for open-source ecosystems as they might disrupt them. In addition, regulations are still being set. However, when applying a more realistic lens, the potential of permissioned ledger systems should not be underestimated. Because of the properties of different types of distributed ledger systems, firms are building novel skills that allow them to survive in the near future.
DLT forces parties to join forces, organizations are hence building collaborative capabilities that are needed to innovate in the 21st century. You could say that to build valuable solutions for end-customers in this age, collaboration is a must. Innovation ecosystems are emerging and DLT is supporting organizations to thrive in ecosystems. Just remember that DLT is one way of solving multi-party demands.
To make sure knowledge can return to the host organization, internal innovation labs are used. Despite the fact that each firm works with a different type of innovation office, the key driver to make sure knowledge flows back into the core organization is pro-active innovation management.
By reflecting on what we’ve seen in the past two years, we were able to break down DLT learnings while seeing blockchain in a different light, which resulted in a new definition of blockchain:
“Blockchain for enterprises enables firms to explore new business models, drive internal innovation, build collaborative capabilities and transform their vision, mindset and ways of working into the new.”
Blockchain drives the development of innovation capabilities and helps prepare your organization for the future. Need any help with that? Let’s get in touch to share our points of view!