Authors: Tuhu Nugraha and Raine Renaldi*
In an era where technology increasingly penetrates the structure of modern cities, the concept of smart cities emerges as a milestone in the urbanization revolution. Utilizing digital solutions and advanced connectivity, smart cities promise improved efficiency in public services, sustainable infrastructure, and a better environment for their citizens. However, implementing technology on such a broad scale is not without challenges, especially when it comes to the use of blockchain.
According to the Smart Cities Market Report released in February 2024, the smart cities market is experiencing exponential growth, with projections showing a significant increase from USD 549.1 billion in 2023 to USD 1,114.4 billion in 2028, indicating an impressive CAGR of 15.2% during the projection period. This surge in adoption is driven by technological advancements, urbanization trends, and increasing recognition of the benefits of smart solutions.
Originally adopted to strengthen crypto networks, blockchain is now finding its place in various aspects of public services. In the context of smart cities in developing countries, blockchain offers highly desired solutions related to transparency and efficiency. However, before fully adopting this technology, it is necessary to consider various potential risk factors.
Blockchain Trilemma
The blockchain trilemma highlights the challenge of achieving an optimal balance between decentralization, security, and scalability on a blockchain platform. For developing countries, balancing these three aspects can be a major obstacle. For example, while decentralization can enhance security and trust, it can sometimes sacrifice scalability, which is crucial for handling high transaction volumes in densely populated smart city environments.
In the context of smart cities, the priority of the blockchain trilemma depends on the specific needs and context of each city. However, generally, scalability and security are often prioritized over decentralization.
Scalability is crucial because smart cities need to handle large volumes of data and transactions in real time. Traditional blockchains, like Bitcoin, might have low throughput and are unable to handle such large workloads. Therefore, more scalable blockchain solutions, such as Ethereum and Hyperledger Fabric, are essential to meet the needs of smart cities.
Security is paramount, as the data and infrastructure of smart cities are susceptible to cyber-attacks. Blockchain security plays a vital role in safeguarding sensitive information and maintaining the integrity of the system. Consensus mechanisms such as proof-of-stake and proof-of-authority are crucial for enhancing the security of blockchain technology. In the initial stages of applying blockchain technology in the context of public services or smart cities, its application should be limited in scope. For example, it could be confined to managing transactions that capitalize on the inherent security features of blockchain technology, rather than handling personal data management. This cautious approach allows for testing and improving the technology in controlled environments before broader implementation.
Meanwhile, decentralization, although a core value of blockchain, does not always have to be the top priority in the context of smart cities. A semi-decentralized model, where the government or a trusted consortium plays a central role, can provide the right balance between decentralization, scalability, and security, suitable for the needs and dynamics of each city in smart cities.
Cost Factors of Blockchain Adoption
Setup costs and transaction fees are critical factors to consider in the context of developing countries when contemplating blockchain implementation. Developing countries often face significant budget constraints, and therefore, the additional expenditures associated with blockchain infrastructure and transaction fees can be a significant barrier. Budget constraints can hinder a country’s ability to adopt blockchain technology, despite its clear benefits.
The importance of considering costs in the context of developing countries is because uncontrolled spending can lead to additional pressure on already limited financial resources. In this case, finding cost-effective solutions for blockchain implementation becomes crucial. This requires careful research and thorough planning to ensure that every expenditure related to blockchain provides value commensurate with its investment.
Cost variables to consider in blockchain implementation include direct and indirect costs. Direct costs include expenditures for technology infrastructure, including hardware and software needed to run the blockchain network. Indirect costs include operational expenses, such as labor costs to manage and maintain the infrastructure, as well as costs for security and network maintenance. Additionally, the transaction fees charged for each transaction processed on the blockchain also need to be considered, as they can be a significant additional burden, especially on a large scale.
In the context of developing countries, emphasizing cost efficiency is key. Selecting cost-effective blockchain infrastructure and efficient transaction solutions are important steps to ensure that blockchain technology can be implemented sustainably and provide maximum benefits without compromising the financial balance of the country. Therefore, a deep understanding of setup costs and transaction fees, as well as efforts to find economical solutions, are crucial steps in accelerating the adoption of blockchain in developing countries.
Interoperability
One possible strategy is to adopt a modular approach in blockchain implementation. By separating key functions from the blockchain platform, smart cities can avoid excessive dependence on a particular technology. For example, integrating open standard protocols that can operate with various blockchain platforms can help reduce the risk of dependence on a single vendor or platform.
Additionally, it is important to consider flexibility and interoperability when selecting a blockchain platform. Platforms that can easily integrate with existing infrastructure and support open standards will allow smart cities to optimize the use of blockchain technology without being locked into a specific ecosystem.
In this context, collaboration between governments, the private sector, and international institutions can also help drive the development of global standards for blockchain technology. Openly managed standard initiatives can facilitate integration between different platforms and reduce barriers to the adoption of blockchain technology worldwide.
By considering these factors, smart cities can avoid excessive dependence on specific blockchain platforms and fully leverage this technology to enhance the efficiency and quality of public services.
Socio-Political Risks
Blockchain implementation not only offers technical benefits but also carries significant social and political risks, especially in developing countries where public trust in government tends to be low. Data ownership and privacy issues are sensitive points that can trigger political tension and social protests. In this context, it is crucial for developing countries to carefully consider the social and political impacts of using blockchain.
With vulnerable political systems and high levels of corruption, blockchain implementation can also reinforce public suspicion towards the government. An inability to access or control their data can intensify suspicions that the government is using this technology to monitor or control citizens. Therefore, it is important to consider openness and transparency in the use of blockchain, ensuring that public interests are prioritized in the process.
To avoid further protests and suspicion, blockchain implementations in developing countries need to prioritize ease of use for the general public. This includes providing clear information and easy access to data collected and processed by blockchain technology. By enhancing public understanding and participation in the use of blockchain, developing countries can reduce the social and political tensions that may arise from the implementation of this technology.
Digital Sovereignty and Data Privacy
Digital sovereignty and data privacy are of significant importance for developing countries wishing to leverage blockchain technology. In this context, choosing a blockchain platform that can guarantee digital sovereignty and protect the confidentiality of national data is a top priority. Countries must ensure that control over data and blockchain infrastructure remains in their own hands, so it is not vulnerable to foreign entities with differing interests.
One alternative solution is to build a national blockchain system managed and controlled by the government or a trusted authority. With full control over the blockchain infrastructure, countries can ensure that sensitive and strategic data remains under national control. However, this approach also has its challenges, such as the cost and complexity of management and ensuring the security and reliability of the system overall.
Another alternative is to involve local or regional consortia in the development and management of blockchain infrastructure. In this way, developing countries can build trust and collaboration with local entities that have aligned interests in ensuring digital sovereignty and data privacy. Such collaboration can strengthen blockchain infrastructure and ensure control remains in the hands of the state while also minimizing the risk of dependence on a single entity or foreign parties.
Additionally, strengthening regulations and policies that support digital sovereignty and data privacy is also an essential step. Developing countries can develop stringent regulatory frameworks to ensure that the use of blockchain technology is within limits that align with national interests and protect data from exploitation by foreign parties. With a holistic and sustainable approach, developing countries can secure their digital sovereignty and leverage the potential of blockchain technology for ongoing progress.
Greenness and Sustainability
An aspect that cannot be overlooked in the use of blockchain technology is the environmental impact it generates. The process of validating blockchain transactions, especially in large networks, requires significant energy consumption, which in turn can increase the carbon footprint. Developing countries, which also have targets to achieve net-zero emissions following the Paris Agreement, must consider this environmental impact.
In this context, finding environmentally friendly solutions to reduce the carbon footprint of blockchain use is essential. Developing countries need to consider more energy-efficient and sustainable alternatives when adopting blockchain technology. For instance, in Indonesia, geothermal energy presents a viable option for eco-friendly mining practices due to the country’s significant geothermal resources. This approach not only aligns with the environmental commitments of developing countries but also caters to the interests of investors who are increasingly prioritizing sustainability in their investment portfolios. Additionally, other countries can explore renewable energy sources that are abundant locally. For example, countries with substantial sunlight can utilize solar energy, while those with strong winds might leverage wind power for blockchain operations. By tapping into these renewable resources, nations can minimize the environmental impact of blockchain technologies, enhancing their appeal to environmentally conscious investors.
Additionally, the environmental aspect will also affect the attractiveness of foreign investment in developing countries. The Organisation for Economic Co-operation and Development (OECD) countries, along with other nations, have committed to achieving the Sustainable Development Goals (SDGs), which include targets for increasing sustainable investment in developing countries. Thus, developing countries that can reduce the environmental impact of blockchain use can attract greater investor interest and fulfill their commitments to overall sustainable development.
By considering these risk factors, developing countries can make more directed decisions in leveraging blockchain potential in the development of smart cities. It is important to remember that while blockchain offers various benefits, its use must be carefully monitored and tailored to the local context and specific needs of the country. With a wise approach, blockchain has the potential to be a major driver of progress in smart cities in developing countries.
*Raine Renaldi, President ID-Opentech Group, Chairman Indonesia Smart City Provider Alliance
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