Strategy. Innovation. Brand.
Disrupting the Lawyers
Filling out unemployment forms.
Last week, I wrote about the process of disintermediation and how it will disrupt banks and bankers. By encrypting transactions and distributing them across a peer-to-peer network, we will no longer need banks to serve as trusted intermediaries in financial transactions. We can eliminate the middleman.
Can we eliminate lawyers as well? You bethca.
We have lawyers for the same reasons that we have bankers: we don’t trust each other. I don’t trust that you’ll pay me; I want your bank to guarantee it. Similarly, I don’t trust that you’ll honor our contract; I want a lawyer to enforce it.
But what if we could create a contract that didn’t need a lawyer to interpret and execute it? We could eliminate the lawyer as an intermediary. That’s exactly the idea behind smart contracts (also known as self-enforcing or self-executing contracts).
First proposed by Nick Szabo back in 1993, smart contracts use software to ensure that agreements are properly executed. Not surprisingly, smart contracts use blockchain technologies spread across peer-to-peer networks. If you think that sounds like Bitcoin, you’re right. Indeed many people think that Szabo created Bitcoin using the pseudonym Satoshi Nakamoto.
So how do smart contracts work? Here’s how Josh Blatchford explains it:
“… imagine a red-widget factory receives an order from a new customer to produce 100 of a new type of blue widget. This requires the factory to invest in a new machine and they will only recoup this investment if the customer follows through on their order.
Instead of trusting the customer or hiring an expensive lawyer, the company could create a smart property with a self-executing contract. Such a contract might look like this: For every blue widget delivered, transfer price per item from the customer’s bank account to the factory’s bank account. Not only does this eliminate the need for a deposit or escrow — which places trust in a third party — the customer is protected from the factory under-delivering.”
Smart contracts, in other words, precisely define the conditions of an agreement — not unlike dumb contracts. They also execute the terms of the contract by automatically (and irrevocably) transferring assets as the contract is fulfilled.
Blatchford wrote his description in VentureBeat – an online magazine that helps venture capitalists identify and invest in leading edge technologies. This suggests that the money to fund smart contract platforms is already flowing.
Indeed, the first smart contract platform – Ethereum – launched in July 2015. Ethereum’s website describes the endeavor as “… a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.”
Ethereum seems to be essentially a developer’s platform today. Developers can use the platform to develop applications that eliminate the need for trusted (human) intermediaries. Should lawyers be worried? Not yet. But soon.
Blockchain Beyond Bitcoin
Blockchain – It’s not just for Bitcoin anymore.
In 1979, Paper Mate introduced the world’s first ballpoint pen with erasable ink. Technology analysts considered it an important breakthrough and the news made headlines around the country. Many of us thought, “Wow! Finally I can write in ink and then erase it. How cool is that?” After a few moments of reflection, we had a second thought, “Why would I ever want to do that?”
Before erasable ink, we thought of ink’s permanence as a drawback and a disadvantage. After erasable ink appeared, we realized that ink’s permanence was actually its primary benefit. Write it once and you know it will never go away. If you might want to erase something, use a pencil.
In an odd way, permanence may also be the primary benefit of the blockchain technology that underlies Bitcoin. We think of databases as interactive, up-to-date records of the world as it is. The closer to real-time, the better. If you want to know what’s happening right this millisecond, high-speed databases will tell you.
But what if you want to know what happened some time ago? And what if you want assurances that the information you retrieve is tamper-proof and immutable? In other words, what if you want the electronic equivalent of permanent ink?
That’s exactly what blockchains on distributed ledgers give you. You can’t change the blockchain unless you can decrypt it – and that’s very difficult. Even if you can decrypt it on one network node, many original copies exist on other nodes. It’s fairly easy to restore the status quo ante. You can be very confident that the information you retrieve is unchanged from the original. It’s an immutable, permanent record.
The blockchain/ledger technology allows Bitcoin to keep a permanent record of all transactions. That’s important if you want to create a trusted financial system. But why stop at financial transactions? Are there other transactions that might benefit from permanent, tamper-proof records?
Indeed, there are. Here are a few that are in production or beta today:
- Ascribe – allows artists to “…lock in attribution [and] securely share and trace where your digital work spreads.”
- Storj – a potential weak point of cloud storage is that, ultimately, your data is assigned to one server. What if that server fails or is corrupted or hacked? To improve security and privacy, Storj breaks your data into blockchains and stores it on multiple servers.
- BitHealth – while Storj can store most any kind of data, BitHealth focuses on healthcare data. It claims to provide highly secure, uninterruptible, tamper-proof health data around the world.
- Everledger – where did your fancy diamond come from? How did it get here? Where is it insured? For how much? Everledger keeps a permanent, immutable “ledger for diamond certification and related transaction history.”
- Proof Of Existence or Bitproof — you want to prove that you had an idea at a certain date (preferably before anyone else). You could file a patent application. But that’s expensive, time-consuming, and public. Or you could register your document in the Proof of Existence or Bitproof blockchain databases.
- Warranteer – you buy a product that comes with a warranty, which is described in a document. The product goes bad at approximately the same time that the document goes missing. Why not save the warranty in Warranteer’s blockchain, cloud-based database?
I could go on and on. (If you want to dig deeper, click here, here, and here). While Bitcoin popularized the technology, blockchain extends far beyond the financial world. Indeed blockchain may disintermediate and disrupt supply chains around the world. If so, the world will get much more efficient. Is that what we want?
Disrupting the Bankers
Typical banker.
When I need a ride, I no longer call a dispatcher. Rather, I call a driver directly, using a service like Lyft or Uber. When I want to watch a TV show, I no longer tune in to a local TV station and wait for them to show it. Instead, I just stream it to my computer.
In short, I’ve eliminated the middleman. The process is called disintermediation – I’ve eliminated the intermediary. We see it happening in publishing, lodging, ride sharing, television, even in adultery.
So what about banking?
Traditionally, banks are trusted intermediaries that allow us to conduct business with strangers. You buy something from me and I want to be paid. You give me some token of value. Can I trust you? Maybe not. So I turn to the banking system. Your bank can verify that you have the necessary funds on deposit. My bank can verify that your bank will actually transfer those funds to my account. It’s a valuable service and banks charge a significant fee for it.
As intermediaries, banks are subject to disintermediation. If we can eliminate them, we can create a simpler, cheaper, more efficient system. That’s the promise of Bitcoin, which uses an encrypted blockchain to enforce trust through software.
To date, Bitcoin’s fans include hipsters, drug dealers, terrorists, and libertarians — people who prefer anonymity and cash rather than credit. The fan club has given Bitcoin a seedy reputation. Mainstream financial institutions might well ask, With friends like those, who needs Bitcoin?
The short answer is: Anyone who can’t access a trustworthy banking system. As Jeremy Millar points out, that includes much of the third world. If you’re trying to run a business in, say, Greece or Argentina, you’ll encounter an array of financial obstacles, including currency controls and cross-border payment limitations. Your suppliers can’t trust that you will pay them promptly. Nor can you trust that your customers will. Since the banking system can’t supply a trusted intermediary, you turn to Bitcoin. According to Millar, Bitcoin will find a niche in the third world and expand from there. (If so, Bitcoin will closely follow Clayton Christensen’s model of disruptive innovation: 1) find a niche; 2) mature; 3) disrupt).
And who else might need Bitcoin? Well, the banks themselves. Bankers realize that they are likely to be disrupted. So why not disrupt themselves rather than waiting for someone else to do it for them?
That appears to be exactly what a Wall Street startup named R3 is planning to do. R3 doesn’t use Bitcoin per se but rather the cryptographic technology that underpins Bitcoin. In addition to the blockchain that identifies transactions, R3’s system uses distributed ledgers in a peer-to-peer (P2P) network. The system consists of many nodes that replicate information. (It’s similar to Napster). Since information is distributed across many nodes, there is no single point of failure. Since the nodes can be scattered around the world, no single government can control it. Since transactions are copied to multiple nodes, it’s also very hard to cook the books. The system builds trust through replication and encryption.
According to its latest press release, R3 has now signed up 42 major financial institutions. The list includes some very heavy hitters, including Banco Santander, Deutsche Bank, J.P. Morgan, Goldman Sachs, HSBC, Royal Bank of Canada, and SEB. The consortium is now building a technology platform that will allow members (and presumably non-members) to build global applications.
In essence, R3 plans to bring us a version of Bitcoin run by professional financiers rather than wild-eyed technology radicals. That’s not such a bad idea. But there’s also a darker side. If R3-like platforms succeed, the world’s financial system will be controlled by bankers rather than by governments. So we come back to a question of trust. Whom do you trust to run the global financial system: bankers or governments?
Sending A Memo To Your Future Self
Memo to self…
We know a lot about the future. We can’t predict it precisely but we can often see the general contours of what’s coming. With a little imagination, we can prepare for it. We just need a structure to hang our imagination on.
As an example, let’s take organizations that are undergoing rapid and/or stressful change. We know a lot about such organizations. We know, for instance, that:
- Communication suffers – people are distracted and don’t listen well. Bain estimates that only 20% of the information communicated actually gets through. Attention spans get shorter than ever. Tip: don’t give long speeches.
- Memory becomes less accurate – stress affects memory in odd ways. Even in normal times, different people remember the same event in different ways. It gets worse in stressed out organizations.
- We hear mixed and contradictory messages – change doesn’t happen smoothly across the organization. Some departments move quickly; others move slowly. When we talk to different people, we’ll hear different messages. It’s hard to tell what’s really going on.
- We jump to conclusions more urgently — as the Heath brothers point out, we jump to conclusions all the time. Stress makes us even more jumpy. We’re anxious to get a solution and don’t take the time to consider the evidence.
- Trust withers – it’s hard to trust people when we remember things differently, hear different messages, and jump to different conclusions.
I could go on but you get the picture. We also know that organizational change happens in three phases. At least, that’s what the theorists tell us. Here are four different models of the change process (here, here, here, and here). They use different descriptors but all four describe three distinct phases of change. Note that the middle phase is a trough – that’s where the going gets tough.
The trick to preparing for the future is to start imagining it before we get to the trough. Change managers refer to the trough with words like frustration, depression, resistance, and chaos. It’s not a good time for imagining.
So we start the imagination process in Phase 1. We’re still cool, calm, and collected. We can think more or less clearly – especially if we’ve studied critical thinking. We can think about the future dispassionately and plan how we want to behave.
We sit down in groups and discuss the issues we can anticipate in Phases 2 and 3. We know, for instance, that we’re likely to hear contradictory messages. How do we want to behave when we do? What can we do now to outline “best behaviors” for the stress created by contradictory messages? What can we do to ensure that we actually implement the best behaviors? What else might happen in the trough? How do we want to behave when it happens? We talk, discuss, debate, imagine, and agree.
We then write down what we’ve agreed to. In effect, we’re writing a memo from our current selves to our future selves. From our cool, calm, dispassionate selves to our stressed and anxious future selves. We make clearheaded decisions in Phase 1. When we get to Phase 2, we can refer back to our own wisdom to help govern our actions
I call this process Structured Imagination™. What we know about the future gives us the structure. We use the structure to focus our imaginations. We imagine what will happen and how we’ll behave when it does. This prepares us for the hurly burly of change and also vaccinates us against many of the ill effects of the trough.
Structured Imagination is not a perfect process – the future may still throw us a curve every now and then. However, I’ve used the process with multiple clients and they say that they face the future with greater confidence and clarity. That’s pretty good. If you’d like me to do a Structured Imagination workshop with your organization, just drop me a line.
Surviving The Survivorship Bias
You too can be popular.
Here are three articles from respected sources that describe the common traits of innovative companies:
The 10 Things Innovative Companies Do To Stay On Top (Business Insider)
The World’s 10 Most Innovative Companies And How They Do It (Forbes)
Five Ways To Make Your Company More Innovative (Harvard Business School)
The purpose of these articles – as Forbes puts it – is to answer a simple question: “…what makes the difference for successful innovators?” It’s an interesting question and one that I would dearly love to answer clearly.
The implication is that, if your company studies these innovative companies and implements similar practices, well, then … your company will be innovative, too. It’s a nice idea. It’s also completely erroneous.
How do we know the reasoning is erroneous? Because it suffers from the survivorship fallacy. (For a primer on survivorship, click here and here). The companies in these articles are picked because they are viewed as the most innovative or most successful or most progressive or most something. They “survive” the selection process. We study them and abstract out their common practices. We assume that these common practices cause them to be more innovative or successful or whatever.
The fallacy comes from an unbalanced sample. We only study the companies that survive the selection process. There may well be dozens of other companies that use similar practices but don’t get similar results. They do the same things as the innovative companies but they don’t become innovators. Since we only study survivors, we have no basis for comparison. We can’t demonstrate cause and effect. We can’t say how much the common practices actually contribute to innovation. It may be nothing. We just don’t know.
Some years ago, I found a book called How To Be Popular at a used-book store. Written for teenagers, it tells you what the popular kids do. If you do the same things, you too can be popular. It’s cute and fluffy and meaningless. In fact, to someone beyond adolescence, it’s obvious that it’s meaningless. Doing what the popular kids do doesn’t necessarily make your popular. We all know that.
I bought the book as a keepsake and a reminder that the survivorship fallacy can pop up at any moment. It’s obvious when it appears in a fluffy book written for teens. It’s less obvious when it appears in a prestigious business journal. But it’s still a fallacy.
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