Ricardian contracts — legally binding agreements on the blockchain

The idea for Live Contracts has been lingering around for a while. Take for example the extant concept of Ricardian contracts, which is very similar. Ricardian contracts originate from early work done by Ian Grigg, an expert in blockchain technology and cryptocurrency, during the mid 1990s.

What is a Ricardian contract?

A Ricardian contract was conceived 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 between and a protocol that integrates the agreement securely within a digital infrastructure, meanwhile offering a high level of security because of cryptographic identification.

Read like an ordinary text document

A Ricardian contract is therefore readable both by machines and by people. Machines read the contract within digital infrastructures and people read them as a plain text document. This allows all parties to a contract to properly process the information laid down therein. This type of contract interweaves computer language with regular language, making transaction costs much lower : it can contribute to a faster resolution of disputes and the agreements can be executed more easily.

What is the purpose of the Ricardian contract?

A special feature of a Ricardian contract and its blockchain technology is transparency. Risks of fraud can be kept to a minimum because publications of, and references to, that specific data are done using cryptographic hashes. The digitalisation of documents that represent financial transactions (such as payments) hence will become increasingly common in the near future.

Definition of a Ricardian contract

In the mid-1990s Ian Grigg made an important contribution to a digital infrastructure for the transport of digital properties. This model is known as “Ricardo” (named after the British economist David Ricardo) and was developed by Systemics Inc., an American company specialized in financial transactions, electronic payments and cryptography. A Ricardian contract can be described as:

“An agreement in the form of a single document that is presented by an issuer to an owner of property, where the ownership right of the owner is managed by the issuer of the document. The document must be clearly legible, just like traditional contracts on paper. In addition, the agreement must be legible by programs and software and be digitally signed, using digital keys and server information, in combination with a unique and secure identification method “.

British economist David Ricardo 1772–1823

Strict separation between issue and execution of transactions

A Ricardian contract forms a connection between legislation and the digital world created by the hash function. All rules and conditions that are part of an agreement are integrated in the contracts. In doing so, the issue of transactions and their execution are strictly separated, which in turn contributes to safety. A Ricardian contract establishes the agreements made between the acting parties, so that programs controlled by these parties can execute this agreement.

Reference to the hash of a Ricardian contract

The offer is signed with a regular digital signature. The contract is accepted by agreeing to the transaction referring to the hash of that contract. If it concerns a payment system, the secure payment will refer to the hash of that contract, but also to the paying and receiving parties. This payment can be done through a manual transaction, but it can also be carried out by a smart contract. With a smart contract, the acceptance of a transaction would be carried out on the basis of the smart contract code.

Hidden signature

The signing of a Ricardian contract by the parties concerned is done through private keys. The signature of the provider of the contract is added to the document, which creates a legally binding and legible offer with regard to the information (for example property) that is described in the document. If parties later participate in a Ricardian contract (for example if they want to make a payment), the cryptographic “hash identification method” is overwritten from the signed original document. Using the hash of the agreement ensures that a hidden signature is attached to the contract.

What is the difference between a Ricardian contract and a smart contract?

Smart contracts refer to a type of digital agreement that has already been agreed and can be executed automatically. A Ricardian contract is a contract model to record the “intentions” of a contract and all “actions” that relate to that contract, even before the contract is executed. Using the hashes that refer to external documents, Ricardian contracts can also easily refer to code. There will undoubtedly be more cross-fertilization between Ricardian contracts and smart contracts in the future and transactions will probably be carried out on the basis of different hybrid forms.

What can a Ricardian contract be used for?

Ricardian contracts can be used for any type of agreement. Unlike smart contracts, it is not limited to use in simple circumstances such as financial transactions. A Ricardian contract is used to determine the responsibility (liability) of an acting party when trading with another party. A contract represents a unit of certain goods or services. A Ricardian contract uses a signed agreement between parties, which cannot be falsified once a contract has been signed.

BowTie diagram

A Ricardian contract divides the agreement between parties over time and domain and uses a so-called “BowTie diagram”. This diagram visualizes certain risks in a clear schedule. A BowTie diagram relates to negotiations and the drafting of a legally binding contract and makes clear all the objectives of the contract.

Legislation

New solutions of contract automation can become successful, because they solve real issues in legal practice. The technology is still in full development and the legal framework for it is lagging behind. A Ricardian contract, however, is already acceptable within the existing frameworks of legislation.

LegalThings One is a platform for running Live Contracts. Token pre-sale starts on 6th of December 2017. Visit livecontracts.io for more information.

© All copyrights relating to Ricardian contracts belong to Mr I. Griggs of Systemics Inc. For more information visit his website on http://iang.org/ and read his white paper on http://iang.org/papers/ricardian_contract.html