One of the most difficult elements in the development of smart cities is how to finance them. Local government doesn’t have the money for it and while state and federal governments might have more money to spend there is no way that their current tax funds could pay for even a fraction of the investments that are needed.

Indeed the reality is that in order to create a smart city—one that will be far more cost-effective to run, where significant money can be saved, and where costs and benefits can be more equally spread—massive up-front investments are needed.

At the same the benefits of a smart city are social and economic and can lead to very significant cost savings (there are many examples of 60%-80% cost savings—just look at the digital economy companies). But in general they don’t generate the large new revenues on which more traditional business models rely.

There are no easy solutions to this dilemma, but perhaps some new ideas are emerging that fit well into the new economic models that are beginning to emerge in the sharing economy.

Could Blockchains be of assistance here? While based on the same principle as bitcoins blockchains for smart contracts is perhaps the first mainstream application of this technology. Bitcoin has taken off in the market of criminals and shady businesses, and that is not necessarily how we as a society believe that new technologies should be developed. But, possibly at least in part due to the success of the criminal activity, the technology has received more attention and fortunately that has led to a far more constructive development.

What this technology does is establish a real-time, independent, reliable, transparent and incorruptible ledger where the various transactions take place in real time, with real-time payments being transacted between the parties involved.

This is crucial for the development of new business models, and it also reduces the administrative costs to near-zero.

I recently used the example of smart grids where distributed renewable energy and storage devices can be linked to a blockchain system wherein real-time transactions and payments are made.

It is also not too difficult to envisage that such a transaction-based system could be used in the broader sense of a smart city. If we look at many of the smart city projects that are being planned—and in some instances are already operating on a project or pilot basis—and add blockchain to it, the light clearly comes into view at the end of the financial tunnel.

A smart city will depend heavily on an IoT infrastructure linked to big data and data analytics.

If we have that data and are able to use it in sophisticated ways we can link that to smart city applications. Looking at the smart grid/blockchain example, what can happen here is that those who generate more renewable energy can easily make that and offer it cheaply to the market, and get paid for it. And the same goes for people who have invested in smart devices that can store—not just batteries but also hot water systems, fridges, etc. Energy can do the same or both. Those who save energy benefit, and those who don’t pay more for it.

Now think about systems such as Uber and AirB&B. With blockchain many other sharing economy businesses can be developed within a city, neighbourhood or community and, depending on the nature of the service, can be linked to a smart transaction and payment system.

This will be a much fairer system, since everybody can participate and will be rewarded to the extent of their participation in the sharing economy. It also allows those who care about the environment, society and sustainability to participate through separate distributed blockchain systems linked to specific services created for those groups. It provides the economic model that can underpin a much broader sharing economy model with a range of sub-models within it. For example, it can also apply to government services such as transport, garbage collection and community services. It enables services to be linked to transaction-based payment systems, but equally to a bartering model or to a model based on voluntary services.

Cities such as London, Milan and Singapore operate congestion-based tax systems for car use. This can also be managed through a blockchain-based system that provides accurate and fair information—based on real-time data from the actual (smart) cars wherever they are—about congestion. And ‘the system’ could charge accordingly, not just based on a one-size-fits-all model; or people can adjust the way they will reach their destination, thus avoiding the congestion charge.

These systems will provide people with accurate information, according to which they will change their behaviour in relation to energy use, transport, garbage collection/recycling, job and business opportunities and so on.

So how to proceed ...

First of all, blockchain is an open system so the barrier of entry is very low. Trust will be a key issue and if the various levels of government are going to take a lead here that would greatly stimulate its uptake. If it is implemented at the same time as IoT-enabled smart city systems the two parts could be seamlessly linked.

Banks are already taking great interest in the blockchain technology, so we can certainly expect models to emerge from that sector. While this is admirable, blockchain also offers a far more bank-independent distributed financial system—in fact this was the key reason for the invention and development of the blockchain technology.

There is obviously still a long way to go before we will see a widespread use of blockchain-based transactions, but I think we are onto something here.