Innovation versus disruption

Using a stupid story to explain an important distinction

In the blockchain world, or the tech space in general, the words innovation and disruption are constantly thrown around. They are mentioned so often that they start to lose meaning, and worse, are often used interchangeably. But there is a key distinction between them, and I believe that understanding that distinction is key to being able to make decisions in the blockchain space. It doesn’t matter what end of the spectrum you’re in — it just matters that you know you’re there, and what it means to be where you are.

So let’s go ahead and define the words. Well, actually, I’d rather do this differently. I have not looked up the dictionary definition of the words prior to writing and would prefer instead to tell you a story. The story should give you an understanding of how I view the two concepts, which I will later define in my own words. You may then choose to agree or disagree, but at a minimum, I hope you will reflect on the terms and their differences, which is essentially the objective.

Two out-of-shape workers and an old building

Imagine a company which has its offices on the top floor of an old building. The only way to go up and down is via the stairs and for whatever reason, the company has a need to get boxes up to the office on a regular basis. As such, they hire two guys to do the job. All they do is carry boxes from and to the top floor. You pay them each $10/hour, which is the standard rate for any job in this economy. Now that you’ve hired them, let’s take a look at who they are:

Look at them hard at work! Business is going well and your workers are doing the job to the best of their ability. Sure, they are perhaps not the best fit, but they are enough for your needs. Then one day before you go to work you hit the gym for your early-morning treadmill session. At the gym you encounter this guy:

He was over there bench pressing twice your weight when you approached him and started to have a chat. Turns out he’s unemployed and looking to get back into the workforce. You realize he could carry your boxes all by himself and so you hire him! As the standard rate is $10/hour, you can now bring him in and fire the last two workers, cutting your costs in half. The number of boxes to be carried hasn’t increased, but now your costs are lower, the boxes reach the top floor faster and you don’t have to worry about employees with back pain anymore. To me, this is innovation. The way in which you get boxes up and down hasn’t changed, it has just improved. Innovation in my mind is the following: a significant improvement in the performance of a process, without a major change in how that process is inherently performed. This definition, I recognize, is controversial. With respect to the history and possibly the original meaning of the word, it may be flawed. However, the word innovation is constantly thrown around for such minor improvements and changes that I find the definition suiting. More on that later.

Now, in the context of the fictional company, what would you call this:

That’s an elevator, by the way.

To me, the elevator is the symbol of disruption in this case. As I’d define it, disruption is an inherent change in the nature of processes. And a key thing to note about disruption in my framework: it is not necessarily positive. Think about it, in order to add the elevator, the company must get a permit, pay for the elevator and installation, employees will have to cope with dust and noise during the installation process, so on and so on. There’s a present cost but only a potential future benefit. The installation could fail, for example, and the net benefit will also depend on how often boxes need to be brought up to the top floor. From the company’s perspective, if boxes only need to be carried up once a month, maybe the investment won’t have an acceptable payback period. But if multiple boxes are being transported daily, it may be worthwhile. Either way, it’s still a bet with somewhat uncertain consequences for the company. And there’s another thing: asymmetric benefits. Employees of the company have only to gain as they will not need to take the stairs anymore and do not have to give up anything for it. The company, on the other hand, can win or lose. And that’s how disruption works: it has uncertain outcomes, and not everybody wins.

Before I continue, an observation is due regarding my definitions. As mentioned, they are my own, and not necessarily accurate in everyone’s view. Academics, for example, may argue that what I call innovation is actually a type of innovation called incremental innovation, while what I call disruption is what is often referred to as radical innovation. Personally, I would argue that the poles on the spectrum of innovation proposed by academics are actually not extremes of one continuum, but rather separate concepts. Related concepts, but separate nevertheless. You may call them what you wish, but one thing is introducing some improvements to a certain operation, and another thing is to completely change the way that operation is done, for better or worse. The iPhone was disruptive, but all the smartphones that came after it were mere innovations. And that doesn’t mean innovation is bad, on the contrary, it’s often great, but my point here is that it is just inherently different from what I view as disruption, hence we should not use the terms as synonyms. As a final example, we can all agree social media was a disruptive development, but it’s very much debatable if it is beneficial or not.

Now let’s take this back over to the blockchain realm. If cryptocurrencies were certainly going to disrupt banking, for instance, banks would unlikely come out of the other way doing better than before. That’s because they are on top of the current system and so have a lot more to lose than to gain from an inherent change to it. Imagine you were playing Monopoly with friends and halfway through you all decide to add a few new rules to make the game interesting. The game is still the same, so the current winners are still on top, but it just has a few tweaks to it to make it better (more fun). But what if suddenly you decided to stop playing Monopoly before the end of the game and switch over to some other game? Those who were winning at monopoly can surely still win at the new game, but they were already winning before! Thus, they are more reluctant to change. They are ready to innovate, but cautious of disruption.

But enough with the metaphors, here are some thoughts on how this applies to the blockchain space:

  1. Private blockchains (and DLT protocols) are a significant innovation and are here to stay. They are not too far from the databases we already have to be called disruptive and have clear benefits for those who utilize them. Companies can cut costs without changing the way they do business. For them, it’s a win-win. But that does not mean me and you will gain from it.
  2. Public blockchains (and DLT protocols), on the other hand, have disruptive potential. They have not really disrupted anything yet, and we do not know if they will — but they have the potential to do so. Think about Bitcoin, a currency born out of an internet forum, with no central bank, unbounded geographically, unregulated, and yet, valuable. It’s completely different from currencies as we know them, and thus can change the whole dynamic of financial transactions. Bitcoin challenges the societal structures we have in place and if it lives up to its potential, it is bound to change a lot of things, again, for better or worse.

Now, in saying that public blockchains have disruptive potential, I must again highlight that disruption is not necessarily all positive, and we cannot predict all of its outcomes. But with disruption, major changes are bound to happen, and in the current world, maybe that’s a bet worth taking. It’s up to you evaluate our systems and decide: do they need disrupting? There is no correct answer, but I just hope you put your money where your mouth is.

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