Blockchain technology has the potential to serve as the foundational network layer for many systems that underpin successful smart cities.
Smart cities are gaining popularity around the world as they become targets for many governments. In these urban utopias, there is a clear relationship between the citizens for whom they are designed and the systems, networks, and devices that enable their safe, secure, and efficient operation. Most importantly, they will be built on entirely new financial technology infrastructure that allows micropayments to flow through financial “plumbing” in the same way that other critical utilities (water, energy, data, etc.) flow through pipes, cables, and fiber.
The primary goal of a smart city is to optimize city functions while also promoting economic growth through the use of cutting-edge technologies. Smart cities strive to improve operational efficiency, achieve sustainability goals such as energy efficiency and scarce resource management, and, most importantly, improve the lives of their citizens.
Singapore, Dubai, and Oslo are examples of early-stage, but promising, smart cities. Sensors are used to digitally collect data on traffic volume and pedestrian activity in Singapore, one of the world’s most densely populated cities. The data is then sent to agencies for analysis in order to determine the best course of action, both in terms of real-time flow redirection and policy and planning improvements. Another area of emphasis is the use of smart home technologies to address issues such as waste management and energy efficiency.
A smart city’s primary goal is to optimize city functions while also promoting economic growth through the use of cutting-edge technologies. Smart cities strive to improve operational efficiency, achieve sustainability goals like energy efficiency and scarce resource management, and, most importantly, improve the lives of their citizens.
A smart city owes it to its citizens to operate and report on sustainable infrastructure and to incorporate Environmental, Social, and Governance (ESG) considerations into its design. Implementing incentivization schemes to encourage positive behavior will almost certainly be critical in addressing the most pressing environmental, societal, and economic issues that residents of those cities face. Indeed, as cities work to implement the United Nations’ 2050 Climate Targets under the Paris Agreement, such incentivization schemes could be critical in assisting cities to reduce emissions and achieve a carbon-neutral future.
While fully integrated smart cities are still a few years away, the use of incentivization systems based on the ability to transfer small amounts of value — or micropayments — could hasten smart city development. Simply put, micropayments are real-time transactions for very small amounts, often fractions of cents, made as a user or device actively interacts with a system or process. The proliferation of COVID-19 check in and tracking processes is a recent example of this. We aren’t currently rewarded for signing into public places, but perhaps if we were, there would be a higher level of compliance. A payments infrastructure that supports micropayments would benefit any smart city initiative that requires the collection of data for processing by the city’s analytical systems and responds with community behavioral “nudging” via a reward. Effectively, all citizens and their devices are transformed into “city data prosumers (producers and consumers),” and their participation is rewarded in real-time with micropayments.
Smart cities require public support.
Incentives will be at the heart of successful smart cities. While most people support technological advancement to improve the quality of their lives, the recent abuse of personal data by centralized “Big Tech” platforms has undoubtedly caused public reluctance to participate in technology-driven information gathering.
Data breaches are on the rise as a result of the COVID-19 pandemic. In 2020, confirmed data breaches in the healthcare industry alone increased by 58%. According to the same report, the overall number of web application breaches more than doubled between 2019 and 2020. Smart city initiatives must address these data privacy and security concerns, or else citizen participation will be hampered by concerns about how their data will be used when the technology is adopted.
As a result, consent-focused and trust-building incentivization systems will be required to drive public support for smart cities. Behavioral incentivization, when implemented correctly and with citizen privacy built into the design of the systems, can ensure a smoothly operating and safe city. Citizens could be gently nudged to encourage them to respond in a beneficial way, such as promoting road safety or waste recycling. Micropayments could be paid directly and in real time for compliance with variable speed limits, rewarding children for crossing the street in a safe location, or as a gamified reward for the proper disposal of various types of waste in these examples.
Infrastructure based on decentralized devices
The sensors and devices built into the fabric of smart cities (and their citizens) will be critical. Connected Internet of Things (IoT) devices will serve as the city’s eyes, ears, and hands, automatically collecting data on everything from traffic flow to environmental factors, weather, supply chain tracking, and city resource management (water, energy, waste, etc.). This data will be used to inform and adapt policy, as well as in real-time decision making to ensure the smooth operation of the city’s systems.
As new high-speed networks like 5G and LoRaWAN are deployed, and the use of connected IoT devices for essential services and utilities expands, so will the demand for automated and device-to-device micropayments. Use cases include electric vehicles automatically paying tolls as they pass, drones automatically paying for deliveries, and an IoT network gateway provider being paid by the devices within their range. Scale, speed, and security, as well as delegated authority supported by digital identity, are the primary requirements for these mesh networks of devices.
Tens of billions of always-connected IoT devices cannot be supported by current payment infrastructure. The underlying infrastructure, which connects various data points, devices, and stakeholders, is critical to the success of incentivization systems and the overall integrity of the smart city. Many of these systems, including financial services, supply chain, interoperable identity systems, and new decentralized economic models, will rely on distributed ledger technology as the foundational network layer. Furthermore, because no single centralized entity controls access to the data ledgers and repositories at the heart of the smart city, corruption is nearly impossible.
First-generation distributed ledger technologies, or DLTs, cannot scale to meet these needs without sacrificing security or decentralization, but next-generation DLTs are emerging that can address the very high throughput requirements without sacrificing security and, thus, trust.
If we consider that smart cities will require a new type of financial “plumbing” to support all of their services and will most likely be based on distributed ledgers, then we must consider the type of digital currency that they will use, as public DLTs operate on native token economies or cryptocurrencies. Much has been written about cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs), and while some smart cities may have their own CityCoin currency, we may need to consider a new type of currency: machine money.
In Germany, financial regulators are openly discussing the development of a new type of currency to support their “Industry 4.0” initiatives — euro-denominated machine money that is digital cash but optimized for the ultra-fast transactions required by devices. This would not necessitate the complexity of “wholesale” CBDCs proposed for national financial institutions, nor would it necessitate the fully offline, wallet-based requirements of a “retail” CBDC equivalent of digital cash. Because the transactions will be more straightforward transfers of tokenized central-bank money and may only be intermittently connected to a financial institution, this smart city “machine money” will be less complex. The architecture for these must be resistant to cyber-attacks, network failures, and equipment malfunctions, but will likely necessitate less regulatory intervention.
The financial arteries of all-new’smart’ cities will be built on DLT infrastructure.
These may appear to be far-fetched ideas, but smart cities are already being planned, designed, and implemented all over the world, and they must all incorporate sustainability and ESG considerations into their designs. As the world’s population grows, and we attempt to address and adapt to climate change, food security, renewable energy transition, and financial inclusion, technology will dominate urban planning and development.
From Dubai, Beijing, and Singapore, as well as upgrades to existing urban centers, to massive new cities in Africa, we are likely to see rewards-based incentive systems that use micropayments to nudge and direct citizen behaviors in order to achieve optimal operational equilibrium and measurable sustainability outcomes. To accomplish this, fast and secure DLT-based financial infrastructure will be deployed in the same way that other utilities’ pipes, cables, and fiber optics are, allowing the flow of micropayments to be the commercial and behavioral lifeblood of all new cities.