A city of canals, like Venice or Amsterdam, might seem a good
guess, but the word, were, in the question clearly reveals that
"paved" is meant literally, not figuratively. Noting that, it
becomes clear that the question is an allusion to the
American-authored novel, Hans Brinker; or, the Silver Skates: A
Story of Life in Holland.
So it is was Holland--today, The Netherlands--where, as the
story goes, time was when canal "streets" were paved with water
(ice).