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One of the most promising potential use cases of blockchain technology is the development of “live” contracts that are securely stored inside digital infrastructure and are legally valid and completely tamperproof, thanks to cryptographic identification. Ricardian contracts are bringing that idea to life and have become the latest blockchain sensation to pique the interest of crypto enthusiasts.
If you have even a passing interest in cryptocurrencies, then you’ve probably heard of smart contracts — executable code that’s stored on a blockchain and automatically runs when preset conditions are met. Ricardian contracts are similar at a base level, except that they’re legally binding.
The concept of Ricardian contracts originates from the 1990s, but it has never been implemented on a large scale before. In this guide, we’re going to cover everything you need to know about Ricardian contracts, including the technology’s history, how it differs from smart contracts, and some examples of potential use cases.
A Ricardian contract is a digital contract that functions as a legally binding agreement between two parties based on agreed-upon terms and conditions. The contract is cryptographically signed and verified using the blockchain, but is readable by both people and machines.
These days, almost all documents are stored in a digital format, typically Word documents. However, with so many Word documents being emailed back and forth, it can be tough for all the parties involved to know which is the most up-to-date, authentic version of the contract.
Ricardian contracts solve this problem by taking the legalese used by lawyers and incorporating it with a digital signature. The final step, which is the “magic” of the process, is to secure it using cryptography. The algorithm produces a unique key or hash that is exclusively tied to the document. That hash always refers to that one document, and only that document can reveal that hash.
Whenever the parties involved do anything relating to the contract, they can simply include the hash — not the document, not the name, not an extract — just the hash. Since the contract is easily readable by both machines and people, computers can simply look up the hash to confirm the details, while people can read the contract as a plain old-fashioned text document — allowing all involved parties to easily access and process the laid-out information.
As an example, let’s say the terms of a U.S. Treasury bond are written out using a Ricardian contract. The contract basically turns the bond into its own database with metadata that includes the name of the bond, the issuer, the owner, its denomination, etc. The database contains all of the details of the original agreement, but in digital form with machine-readable tags. The contract is then digitally signed with private keys and hashed so that it can be easily identified. Anyone or any system that wants to access the details of the bond simply has to search for the hash value.
The concept of Ricardian contracts was pioneered in the ’90s by financial cryptographer Ian Grigg, who recently described a Ricardian contract as “simply a text document with all the normal words that the lawyers like to use with all the terms and conditions; it’s a way of communicating a legal document across to a program such that both the program and the human are happy to understand what’s going on.”
Grigg laid out his ideas for Ricardian contracts in a paper published in 1998 entitled Financial Cryptography in 7 Layers. The paper describes the Ricardo payment system built by financial cryptography company Systemics. The system was named after British economist David Ricardo, in honor of his contribution to international trade theory.
Technology in the ’90s wasn’t robust enough to properly implement Grigg’s theories. However, those limitations are now being removed thanks to blockchain technology. There are now a growing number of projects that support Ricardian contracts, including Block.one, the originator of EOS.
Grigg briefly partnered with Block.one and brought his expertise to the EOS platform, which is a self-governing and performance-based blockchain that provides developers and businesses with the tools to build large-scale, consumer-facing decentralized applications. The system includes support for both Ricardian contracts and smart contracts.
Ricardian contracts haven’t been implemented on such a large scale before, but it makes sense that the concept would find a home on the blockchain. Blockchain technology not only satisfies the technical requirements, but it also provides the perfect testing ground for legally valid live contracts.
Smart contracts have received a lot of hype in recent years, but one thing is often overlooked: they can’t, in their current form, replace actual legally binding contracts involving two parties. Ricardian contracts, or at least a hybrid of smart and Ricardian contracts, may hold the key to that problem. Here’s what sets a smart contract apart from a Ricardian one.
The concept of smart contracts was first proposed in the early ’90s by computer scientist Nick Szabo. In simplest terms, smart contracts are digital agreements that automate the actions of blockchain-based applications when predetermined conditions are met. They form the basis of decentralized apps (DApps), which are built on blockchains like Ethereum and are vital for decentralized finance (DeFi).
Smart contracts execute automatically by following simple “if … then” statements which are coded on the blockchain. The network of computers that make up a blockchain executes the actions outlined in the contract when the preset conditions are met and verified. Examples of such actions could be anything from sending notifications and releasing funds to issuing a ticket and registering a vehicle. These actions are immutable, and can’t be altered or undone by anyone.
Programming languages are used to codify smart contracts, and although they’re easy enough for developers to write, the contents of the contract can’t be read by laypeople who don’t understand programming languages. Businesses can’t rely on smart contracts in their current form, because numerous business processes are subject to compliance requirements that involve auditing by humans.
It also doesn’t help that the actions of smart contract code are immutable on the blockchain, which isn’t exactly a desirable feature for companies that must react to evolving circumstances in the real world. Contractual agreements between businesses or businesses and clients often change, and smart contracts don’t offer the flexibility to adapt to any changes.
Unlike smart contracts, Ricardian contracts not only record the actions of a contract but also its intentions, even before its execution. The contract uses a hash to quickly and efficiently refer to a particular document. Here are some benefits of Ricardian contracts:
That’s not to say that Ricardian contracts will replace smart contracts, though. The two will likely mix in the future in some hybrid form of legally binding digital agreements to be executed automatically once the terms are fulfilled by the involved parties. The two technologies, when combined, have the potential to become the future of blockchain-based legal agreements.
While Ricardian contracts are still a new concept, the potential use cases for the technology are limitless. They can be used to forge a wide array of agreements. Below are three use cases for Ricardian contracts:
EOS was among the first crypto projects to implement Ricardian contracts in 2019 by introducing what it called “richly rendered Ricardian contracts” in its tool kit for developers.
EOS pairs features of Ricardian contracts and smart contracts to make the actions and intent of a contract easily understandable to users. This ensures a smart contract’s code is completely transparent, which is an important feature — because blockchain actions are often final.
Before the implementation of Ricardian contracts, it was difficult for an average smart contract user to understand what actions they were agreeing to. Users had to depend on app developers to explain what a smart contract does on the front end, without any auditable association with the actions that take place on the blockchain.
EOS has announced two new features that implement Ricardian contracts and redefine how data is presented to users before they agree to sign transactions:
As an illustrative analogy, think of the Ricardian Contract Specification as a programming language, and the Template Toolkit as a browser that renders documents written in that language. Together, these two features will enable DApp developers to create smart contracts with clear explanations of the agreements their users are consenting to.
Ricardian contracts could considerably broaden the range of possible blockchain applications, especially when combined with smart contracts. They can clearly define the intentions of two parties, legally bind them, and execute actions based on the agreed terms.
Even though the concept of Ricardian contracts is now decades old, the actual use of the technology is still fairly new. If widely adopted, it could have a significant impact on many blockchain processes, particularly in trade and finance.
Head over to our guide to read up about smart contracts in greater detail.