Smart Contracts: a critical tool for the democratisation of sustainable infrastructure projects

This Insight supports the feasibility of a truly decentralised and trustworthy blockchain as a tool to recover the economy and protect the environment with sustainable infrastructure projects.

Introduction

Imagine a blockchain that could host the smart contracts required to execute sustainable infrastructure projects currently needed to enhance citizens’ lives. Better yet, imagine that creating such a blockchain would have an initial structuring cost of only USD 50,000-500,000 (depending on the complexity of its features, according to several blockchain developers) (Chan, 2022; Davies, 2022; Shivani, n.d.).

This Insight supports the use of blockchain and smart contracts for a more efficient, transparent, democratised, and better financed structuring and execution of sustainable infrastructure projects. First, it describes how sustainable infrastructure projects are currently developed. Second, it introduces the technology available to democratise sustainable infrastructure projects. Third, it explains how smart contracts may permit such democratisation. Fourth, it evinces how smart contracts may impact projects’ daily activities. Finally, it presents the challenges that come with implementing these smart contracts.

Sustainable infrastructures and civil society

The Covid-19 pandemic and the war in Ukraine have demanded the most of the world’s resilience. Besides the need to guarantee energetic autonomy, governments and international organisations are aligned in directing their efforts and investments towards the implementation of sustainable projects, seen as fundamental for economic recovery and environmental protection.

In the context of the European Union’s investments to face the pandemic-driven economic crisis (the National Recovery and Resilience Plans – “NRRPs”), the European Economic and Social Committee (“EESC”) issued the Resolution on “Involvement of Organised Civil Society in the National Recovery and Resilience Plans – How can we improve it?”. The EESC emphasised that “prior to the outbreak of the war [in Ukraine], the total amount of national and NGEU [“NextGenerationEU”] funds was insufficient to achieve the objectives of the Green Deal and deliver the just and inclusive energy transition required” and recommended “the creation of new financial investment instruments (…), in order to provide a more secure and sustainable strategic autonomy of the EU”. The EESC also concluded that:

(…) in many Member States, there are calls for better involvement of social partners and civil society organisations in the implementation phase of the NRRPs. Organised civil society calls for more transparency in the implementation and monitoring of the plans and asks that information be made publicly available and that dialogues around the NRRPs with all relevant stakeholders be further encouraged. If this is lacking, there is a likelihood that key challenges would not be addressed correctly.

The EESC highlighted two critical elements to help EU Member States achieve economic recovery, sustainable development, and energetic autonomy. First, by actively and transparently involving organised civil society in the structuring of infrastructure projects, and second, by implementing new financial investment instruments.

Current development of infrastructure projects

Most infrastructure projects demand comprehensive risk assessments, the setting-up of complex contractual structures, interactions among several parties and, consequently, the investment of significant amounts of resources. Such complexity has limited the execution of infrastructure projects, including sustainability-related projects, whose technology-driven costs remain substantially burdensome.

Regular infrastructure projects require a set of agreements entered into by several parties: the project sponsor (with technical, financial, and legal advisors), public authorities (grantors), contractors (and subcontractors), operators, lenders (including accounts and security agents), users, employees, and other entities and professionals required for the project’s successful execution. This complexity demands advisors and parties to work hard on the development of several types of analysis, models, reports, designs, and contracts to facilitate parties’ execution of all project-related activities, throughout its lifetime. The logistics and human efforts around these operations not only represent large costs but are also comprised of actions and processes that computers could execute and optimise.

Decentralisation

Besides the security, transparency, and reliability benefits provided to the blockchain, decentralisation has also proven essential to widen financing structures’ impact. For instance, crowdfunding and initial public offers have allowed the development of important businesses and projects. Furthermore, money market funds like Ant Group’s Yu’e Bao (platform that allowed WeChat and Alipay users to lend money) have shown the microlending sector’s potential to compete with the banking industry and pool resources from millions of individuals intending to invest/lend part of their capital for a reasonable return.

Most players related to the Chinese financial market acknowledge that Yu’e Bao’s business model, its impressive growth since its 2013 foundation (over CNY 1.7 trillion – circa USD 268 billion of assets under management in the first quarter of 2018), and the market share drawn from traditional Chinese banks incited the Chinese regulators to intervene in these money market funds, having also suspended the Ant Group’s IPO in late 2020.

Blockchain of sustainable infrastructures

In line with the EESC, researchers associated with the United Nations have stressed the importance of the blockchain to develop the multilateralism and collaboration that society needs. Therefore, countries and international organisations should seek to promote the development of a truly decentralised blockchain. This would allow the active participation of civil society in structuring and executing smart contracts to implement sustainable infrastructure projects.

As proven by Yu’e Bao, allowing several citizens to invest (and supervise) their money may result in the mobilisation of considerable volumes of resources to structure and execute a project. Moreover, decentralisation is crucial for the blockchain to store and process information and transactions more safely; the more users, the more nodes containing and validating the information within the blockchain. This enhances the blockchain’s capacity to hinder fraudulent attempts at illegitimate transactions, which are easier to undertake against fewer or single-trusted parties. However, reliability demands that only desirable nodes and blocks (free of fraudulent or misleading information) are accepted in the blockchain.

The blockchain is comprised of several blocks of information (that cannot be edited as only new information can be added) which are interlinked and stored in a distributed manner. Existing blocks are able to validate the accuracy and reliability of a new block and then reach a consensus as to whether to append it.

The way existing blocks reach consensus varies according to the set-up of each blockchain. There are several consensus mechanisms that allow all blocks to agree on the state of the blockchain and – by using cryptography methods – guarantee that new information is appended only by legitimate sources. The most popular consensus mechanisms are the proof-of-work (“PoW”) and the proof-of-stake (“PoS”) protocols, where each node stores the whole blockchain and develops the computing required to execute the consensus mechanism to write and include new blocks with relevant information.

Due to their reliable cryptography methods, PoW protocols were used in the first blockchain projects. They have been criticised because of the high demand of electricity required by the elite hardware (and its refrigeration system) needed to solve the increasingly complex cryptographic equations that provide the codes for new blocks creation. Other protocols, such as the PoS, may prove sustainable alternatives to overcome this issue.

PoS protocols require new blocks’ developers to acquire and pledge a certain stake in the blockchain’s local token. Once recognised as a validator, the developer receives new blocks from consolidated peers in the network. Consensus in a PoS protocol can be reached through validators’ votes. Validation of transactions through each active node is rewarded with the local token and the pledged stake could be destroyed if validators misbehave (e.g. being dishonest or lazy, as they are responsible for checking new blocks validity).

The application of such consensus protocols depends on the type of blockchain: whether it has public, private, hybrid, or consortium features. In public blockchains (the largest and most well-known), all nodes have access to full information and may apply the consensus protocol to allow new blocks. In contrast, private blockchains operate on a permissioned basis as restricted networks managed by an entity, which controls transactions’ validation so only permissioned users may access the consensus protocol required for block creation.

Hybrid and consortium blockchains present a midway approach, creating in the same blockchain a permission-based system and a permissionless system so they may choose who has access to certain data. Whereas hybrid blockchains are managed by a single entity, consortium blockchains are managed by a group. Although a truly decentralised blockchain allows for the maintenance of information’s transparency, some project-related contracts deal with confidential data that should be kept private. As such, hybrid/consortium blockchains could hold both private and public information while being controlled by a group which preserves the interests of the project (i.e. governments, sponsors, investors, organised civil society, among others). This is then useful for the execution of smart contracts for sustainable infrastructures.

Smart contracts and sustainable infrastructures for the cities of the future

Smart contracts, written and executed through a blockchain, have as a main feature their ability to self-execute, provided certain pre-programmed criteria or events are triggered. Smart contracts and decentralisation powered by blockchain can enable citizens of the future to directly participate in the execution of all kinds of infrastructure projects and could even take the lead on the structuring of smaller-scale sustainable projects. Such smaller-scale projects will significantly impact citizens’ daily lives, but have yet to be developed due to traditional investors’ lack of interest.

Smart contracts’ benefits have been widely discussed by companies, organisations, and academics, with the following standing out across multiple industries:

-Transparency and control regarding obligations’ performance;

-Replicability of technical, legal, and financial consultancy materials;

-Reduction of required manpower;

-Security and reliability of information;

-Enhancement of coordination among parties;

-Process automation (i.e. payment and document verification), allowing time and costs reduction; and

-Better storage and processing of relevant project information which used to get lost in centralised conventional files.

Furthermore, the oracles’ technology now allows the construction industry to use cameras, drones, scales, and internet data to help smart contracts verify real-life/off-chain information, which is crucial for their successful execution. For instance, the weight of the materials to be automatically ordered, the relevant appearance and measures for a construction work, and the forecast influencing works’ progress and deadlines.

Countries and international organisations could use the resources of initiatives such as the NRRPs to structure a hybrid/consortium blockchain ruled by a PoS protocol and support projects’ feasibility. That blockchain could be used to run several smart contracts related to all kinds of sustainable infrastructure projects (across the world).

Citizens of the future could use their personal computers as nodes and provide the investment needed to obtain the local token to deliver the required proof-of-stake and help with each project’s initial structuring costs. These citizens would have at least the following incentives to add new blocks into that blockchain:

-Feasibility of the projects that would improve their quality of life;

-Cryptocurrency income received for each validated transaction;

-Income from the relevant project’s revenues;

-The desired transparency and control over public resources.

As the value of a blockchain and its related token derives from the level of demand in the market, it could increase as more blocks and projects are developed. The more smart contracts/transactions processed through the blockchain, the higher the token’s demand and value. Such demand/value could increase if projects’ users were incentivised to use the blockchain’s token.

Challenges

As with all new technologies, blockchain and smart contracts may still need to go through several iterations before becoming completely harmonised with citizens’ needs. However, the required evolution can only happen as further implementation, testing, and enhancement occur through the effective adoption of this technology. Governments, international organisations, and civil society need to jointly work towards the development and implementation of a blockchain that allows the execution of smart contracts dedicated to sustainable infrastructures (and other types of public services).

The main challenge to the implementation of these smart contracts seems to be finding the right balance between the need to have a truly decentralised blockchain and the required involvement of politically driven entities. Public authorities have to provide the right political, financial, and legislative support for the development of the required blockchain, while guaranteeing its real decentralisation.

Another important challenge is to provide the right incentives to node validators. If they do not find value in the blockchain’s tokens or do not agree with the features and protocols implemented therein, the blockchain will not have the required nodes for the effective performance of these smart contracts. Besides the legislative developments needed to enable a truly decentralised blockchain, countries and multilateral organisations should work on the implementation of tax benefits for investments in the tokens that permit the creation of blocks in the proposed PoS-driven hybrid/consortium blockchain.

Furthermore, developers of blockchain and smart contracts have stressed that the immutability of information contained in the blocks makes the correction of bugs or writing (programming) errors very expensive. Therefore, the structure and performance of smart contracts must be diligently and carefully planned by professionals (including lawyers) prepared to deal with complex challenges and tackle the programming world. Doing so will provide a valuable asset to society and increase these professionals’ market value.

Conclusion To respond to the world’s diverse needs and limited resources, society requires a tool to recover the economy and protect the environment with the development of sustainable infrastructure projects, which entails significant financial efforts. To develop these projects with the desired transparency, civil society needs to be involved in resource execution and projects need to have access to a new financing structure. Current technology already permits the democratisation of sustainable infrastructure projects, or smart contracts, which could enable citizens of the future to improve their quality of life and access needed services. The missing piece is a commitment to develop a truly decentralised and honest blockchain; an endeavour that requires joint action by governments, organisations, skilled professionals, and civil society.

The opinions expressed within the article are solely the author’s and do not reflect in any way the opinions and beliefs of WhatNext.Law or of its affiliates. See our Terms of Use for more information.

Leave a Comment

We'd love to hear from you

We’re open to new ideas and suggestions. If you have an idea that you’d like to share with us, use the button bellow.