History has taught us that even at the earliest stages of human life, contracts are the foundations of our day-to-day transactions. Centuries worth of experience in the documentation, exchange and interpretation of agreements between parties has now been innovated by the latest blockchain technology identified as “Smart Contracts” and “Ricardian Contracts.”
According to Ian Grigg, a pioneer in financial cryptography, a Ricardian Contract can be defined as a single document that consists of the following:
- The Contract offered by an issuer to holders for a valuable right held by the holders and managed by the issuer
- Easily readable by people (similar to a traditional contract on paper)
- Readable by programs (to be indexed and analyzed similarly to a database)
- Digitally signed
- Carries the keys and server information
- Allied with a unique and secure identifier
In its simplest terms, a Ricardian contract is a document defining a type of value for issuance over the internet. It identifies the issuer, being the signatory and any terms or clauses the issuer sees fit to include in the document that can stand as a contract. It exists in the following two formats:
- Plain text format (i.e. most common traditional contract) readable by humans
- Digital duplicate which is written in code and readable by a machine
Ricardian contracts offer advantages such as security, transparency, efficiency, autonomy and trust in transactions between parties, but little is known just how all of this is possible. Each record entered into and held by a user is characterized as an unalterable or immutable copy which includes all records of transactions. Additionally, this provides a secure link that enables all parties involved in the contract to easily monitor and review the entire process in one automated sequence.
Furthermore, Ricardian contracts are now capable of being enforced through a blockchain, which has the ability to store all sources of information — including the contract itself — as it removes an unlimited degree of complexity in storing intermediate or secondary information.
Moreover, transactions do not stop with the agreement between parties. These include payments, trading and matters of finance, which are fundamentally relationship-rich as negotiation money continuously forces a certain degree of due diligence. This, in turn, boosts the issuer-holder relationship as the user has access to the full contract to simplify the issuer’s responsibilities in both moral and legal aspects.
Difference Between Smart Contracts and Ricardian Contracts
Nick Szabo, a renowned computer scientist and cryptographer, first proposed the concept of a self-executing contract in his famed 1994 essay entitled “smart contract”. According to Szabo, “a smart contract is a computerized transaction protocol that executes the terms of a contract.” While a smart contract is executed based on a proforma set of instructions defined by parties, a Ricardian contract steps forward by recording all the details of the agreement in a machine-readable format and, if required, subsequently executes it.
Smart contracts cannot deny functionality through benefits like auto-enforcement ability, immutability, and self-executing nature. Rather, in the current form, these cannot replace actual contracts since these codes are only machine-readable and not legally binding.
Financial cryptographer Ian Grigg introduced an alternative concept of the Ricardian smart contract, where it soon can be possible to create a legally binding agreement that is readable and auditable by humans, as well as coded for automatic execution. This will make smart contracts more reflective of today’s real-world contract counterparts as it will include the part that comes before the implementation of the terms — the legal agreement itself.
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