Smart Contracts vs Ricardian Contracts
ARE THEY REALLY DIFFERENT?
With digitalization on the rise, digital business is being accepted and implemented worldwide. To meet the authenticity and reliability requirements that manual labour ensured, a technology that is instrumental in guaranteeing security is essential. This is where Blockchain comes into the picture. Because it supports global decentralization between peers, Even though it is primarily associated with bitcoin, it can be used in any industry that involves controlling transactions between parties using Smart contracts and Ricardian contracts. Both of these extensively rely on blockchain and yet are significantly different.
Smart Contracts
As described by Nick Szabo, a cryptographer, computer scientist and the man behind the concept of smart contracts,
Smart Contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions.
In layman terms, a smart contract can be thought of as a contract that is encoded on a blockchain. Asset transfer between parties takes place accordingly, as would in the case of a non-digitized traditional contract, the only difference being that this transfer is automatic. Via a computer code, the terms between parties are read and administered automatically as soon as a triggering event is hit. Hence, smart contracts are also known as self-executing contracts. The identities of the participating entities are anonymous, but the contract is a public ledger. The code is supervised by all computers connected to the blockchain network. This ensures transparency. Smart contracts are an implementation of blockchain and hence, support immutability. Thus, once written on a blockchain, the contract cannot be altered. Exchange of assets takes place in a transparent and non-conflicting way. Most commonly, smart contracts are written in Solidity which is the constitutional language of Ethereum.
Diving deeper into understanding how smart contracts work, consider the example of Kickstarter which is a fundraising platform for projects. After entering the project details, teams can set the amount that they would like to collect in order to meet the expenses of their project. Anybody who perceives the idea to be having enough potential to be developed into a successful project can willingly contribute to raising funds. Once the fund goals set by the teams are met, it is granted. Otherwise, the amount the supporters invested is refunded. Here, Kickstarter acts as a middleman between the supporters and the teams, charging a fee for the projects that meet their goals. Both the supporters and teams rely on Kickstarter to provide fair service. The need for a third party can easily be eliminated by using a smart contract. The contract can be coded such that the amount collected is accumulated and if the goals are met within a stipulated period of time, the collected amount is sanctioned to the project team. If not, each supporter gets his money back. The contract here is directly between the participating entities. This process of transfer of funds from one party to another, or back to the same party, or a combination of these, is automatically done depending on whether the terms of the contract are met or not. Asset transfer here is triggered by time, that is, the transfer takes place only after a particular period of time. Smart contracts are self-executing, cost saving, self-verifying, immutable and eliminate the involvement of third parties.
Ricardian Contracts
The idea behind Ricardian contracts was coined by Ian Grigg. According to him,
Ricardian contract is a digital contract that defines the terms and conditions of interaction, between two or more peers, that is cryptographically signed and verified. Importantly it is both human and machine readable and digitally signed.
A Ricardian contract can be thought of as a way to register a legally valid and digitally connected document to a certain object or value. A Ricardian contract places all information from the legal document in a format that can be executed by software. This way it is both a legal agreement and a protocol that integrates the agreement securely within a digital infrastructure. A Richardian contract is therefore readable by both machines and human. Machines can read the contract within the digital infrastructure and people can read a contract as plain text. This type of contract entwine both computer and regular language, therefore making the costs lower. The issue of security within a Richardian contract is solved by cryptographic identification.
One of the most important features of a Ricardian contract is its transparency. Risks of fraud can be kept to a minimum because publications of, and references to, those specific data are done using cryptographic hashes. Hence, the digitalization of documents will become increasingly common in the future.
Currently, Open Bazaar, an e-commerce platform that promotes the exchange of all kinds of goods, uses Ricardian contracts to ensure accountability in the exchange. Before initiating an exchange, a Ricardian contract is generated. After all the parties involved agree on the terms and conditions of the contract, the contract is duly signed and the exchange proceeds further. Digital signatures are used as proof that both parties have agreed to abide by the contract. A cryptographic hash is used to create a tamper-proof record of the contract. In the case of a breach of contract, a legal document can be produced in the court and legal action can be taken. This enhances the security of the exchange and is an extremely useful tool to track the legitimacy of the participants.
Below is a table summarising the differences between a smart contract and a Ricardian contract- two applications of blockchain that have the capacity to greatly influence the functioning of industries and that promote a shift to digitization.
Smart contracts and Ricardian contracts are both implemented using Blockchain technology, but while a Ricardian contract is a human as well as a machine-readable digital document that states the terms and conditions and outlines the actions that will be taken, a smart contract is a machine-executable contract that may or may not be human-readable, and concerns itself with the initiation and control of actions based on the events. Simply put, a Ricardian contract records the agreement and a Smart contract executes this recorded agreement. A Ricardian contract also stores information about the parties involved, the scope of the contract, consequences, and the course of action to be taken in case a dispute arises-a feature that a Smart contract lacks because it only concerns itself with automating the transfer and does not involve legal prose. In addition to being all that they already are, Ricardian contracts can also be modified to automate the process of asset transfer and act as a smart contract, whereas a smart contract cannot act as a Ricardian contract. Thus, Ricardian contracts are more versatile than Smart contracts. Currently, not many businesses prefer to use smart contracts because the contract here is a public ledger, that is, it is written on public blockchains such as Ethereum. These are also not alterable and therefore do not accommodate the constantly changing contractual terms of the corporate world. If combined with Ricardian contracts, these can be made to adapt to the real world better. Such contracts are called Ricardian Smart contracts. With Ricardian Smart contracts, it is possible to create a contract that is legally bound, flexible, human auditable and automatically executable. The evolution of such contracts might change the traditional way of formulating and executing a contract.
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