All About Ricardian Contracts

Businesses and organizations require a legal document or contract to set up rules of interaction and trading. People used traditional contracts in the earlier years. The traditional contracts were made in only human-readable language, which made them vulnerable to ambiguity and fraud. To eliminate the vulnerability of traditional contracts, smart contracts were introduced. Smart contracts served as digital contracts which are unalterable and specify precise regulations of trading without any biases. These contracts are machine-readable and are blockchain-based. A smart contract involves both the parties equally giving them their deserved shares as decided while trading, according to the contract rules via automatic computer codes.

Although smart contracts are real-time self-executing, autonomously verified, cost-saving, third party free, tamper-proof, secure, decentralized, and accurate, they lack human readability. Now, traders and organizations tend to demand a contract that is both human and machine-readable. The lack of human readability in the contracts leads to the development of a contract like a Ricardian contract. Ricardian contracts are both human and machine-readable, making them a next-gen contract. Let us learn about Ricardian Contracts in-depth in this article.

Table of Content

• What are Ricardian contracts?
• What does a Ricardian contract contain?
• How does a Ricardian contract work?
• What is Ricardian’s BowTie model?
• Signing and Intent of a Ricardian contract
• What are the characteristics of a Ricardian contract?
• What are the benefits of a Ricardian contract?
• Ricardian contract vs. Smart contract
• EndNote

What are Ricardian contracts?

Ricardian contracts were initially proposed in 1995 by Ian Grigg, one of the early pioneers in financial cryptography. Ricardian contracts link diverse parties into a legal agreement by using cryptographic signatures. When specific pre-conditions are satisfied, they run automatically. Ricardian contracts not only have specific intentions of trading but also automatically carry out instructions. A Ricardian contract associates a legally binding and digitally linked document with a specific object or value. It converts all information from the legal document into a software-executable format. As a result, it is both a legal agreement between parties and a protocol that incorporates a legal agreement, providing a high level of security using cryptographic identification. The fundamental advantage of a Ricardian contract is that if a dispute arises between the parties involved, the issue may be resolved in court. This is not feasible with smart contracts, which are just instructions based on an agreement. It is difficult to prove a scam or fraud in court if something goes wrong since a smart contract is not a legally enforceable agreement.

Another advantage of a Ricardian contract is that it may be hashed once a human-readable agreement is converted to a machine-readable agreement. After that, the hash can be kept on a blockchain. This ensures that each component of the contract is uniquely identifiable by its hash, making it impossible to amend the original agreement without the knowledge of the other parties. As a result, Ricardian contracts have a high level of security.

More crucially, there is no legal structure in place to support smart contracts. As a result, if an unanticipated occurrence occurs, smart contracts are unable to adapt since there are no standards for how to continue. On the other hand, Ricardian contracts provide a legal framework, which provides clarity for all parties. This implies that, unlike smart contracts, Ricardian contracts must be created and deployed by attorneys.

What does a Ricardian contract contain?

Ricardian Contracts can include everything that can be coded to form a legal contract between numerous parties and instructions that can be utilized to carry out an event or action. A Ricardian contract has the following clauses:

Parties

What is the total number of parties involved? Who are the parties involved in this agreement? What are their representatives’ names?

Time Is an Element

What is the contract’s legality? Is it valid for a set amount of time or indefinitely? In terms of time, what does it mean? For example, if an agreement is not struck within three months, the contract becomes null and invalid.

Creating Exceptions for Various Possibilities

What happens, for example, if one of the parties dies? Alternatively, comparable exclusions.

Conditions

You can use as many or as few criteria and if/then clauses as you wish.

How does a Ricardian contract work?

• Transactions must be issued and executed separately.
  A Ricardian contract connects the legal world to the digital realm formed by the hash function. Contracts include all rules and conditions that are part of an agreement. As a result, the issue of transactions and their execution is firmly segregated, which helps in security. A Ricardian contract formalizes the agreements reached between the parties so that programs controlled by these parties can carry them out.

• A Ricardian contract’s hash is referred to as a hash.
  A standard digital signature is used to sign the offer. By consenting to the transaction refers to the hash of the contract, the contract is accepted. If it is a payment mechanism, the secure payment will relate to the hash of that contract and the parties paying and receiving. This payment can be made by hand, but it can also be handled via a Ricardian smart contract. The acceptance of a transaction using a Ricardian smart contract would be based on the smart contract code, a secret signature

• Private keys are used to sign a Ricardian contract by the parties involved.
  The signature of the contract provider is appended to the document, resulting in a legally enforceable and readable offer for the information (for example, property) stated in the document. If parties subsequently participate in a Ricardian contract (for example, to make a payment), the cryptographic “hash identification method” from the signed original document is replaced. Using the agreement’s hash guarantees that a secret signature is associated with the contract.

What is Ricardian’s BowTie model?

Ricardian contract splits the agreement of both the parties involved in a deal concerning the time of trade and domain of trade. This agreement’s mechanism involves multiple transactions to be accounted for, systematically separating the various parties. With the help of hash, Ricardian contracts connect the legal domain and the accounting world in every transaction. The settlement and creation of legal contract results in forming a central parent document, defining every motive of the agreement.

The main task of a Ricardian contract is to legally record the contractual bond of trading partners. Ricardian contract captures an offer initiated by an issuer to the holder. The offer is digitally signed as per the prescribed format of the offeror. The contract is accepted by signing or agreeing to the transaction and its hash reference. In a Ricardian contract, a confidential and secure payment cites the hash of the contract, mentioning the number of units of payment. At the same time, a smart contract does the acceptance by operating contract codes. Let’s understand this process in a better way by looking at the intention and signing of the Ricardian contract in the next section.

Signing and Intent of a Ricardian contract

Typically, any party’s signature of a contract is done openly with the use of a private key. The original offeror’s signature is often affixed to the original document, forming a fully binding, readable offer for the assets mentioned in the document.

Later contract involvement, such as payments or smart contract execution, will often sign over a signed original document over a hash identifier (produced by a cryptographic hash function). Unlike the first signature, the usage of the contract hash within subsequent transactions also indicates intent and establishes a covert signature over the contract. Although private key signatures have been extensively researched and are governed by legal frameworks such as the European digital signature directive, Grigg contends that the trail of hashes – entanglement – provides more effective proof of Intent than a private key signature.

What are the characteristics of a Ricardian contract?

The characteristics for a Ricardian contract are as follows:

• Human-parsable; printable document;
• The program can be parsed;
• All variants, whether shown, printed, or processed, are equivalent;
• The Issuer’s signature;
• All necessary information, including signatures and parties, is contained in a single document;
• It can be viewed as a legal contract;
• It can be recognized securely, which implies that any attempt to falsify the relationship between a reference and the contract is impossible;
• It is backed up by financially sound Private Key Infrastructure;
• It can decipher bonds, shares, loyalty, and so forth;
• It can identify the legal Issuer (contract signer) and the issuance server;
• Cannot be modified by anybody other than the legal Issuer or other contract parties;
• Nature is verifiable;
• The contract may be written and utilized by anybody without the need for allocations in restricted areas;

What are the benefits of a Ricardian contract?

Ricardian contracts rendered several new possibilities on blockchain systems a reality. Some of its applications and advantages are as follows:

• It enables the legally-enforceable exchange of actual assets and rights on the blockchain platform for the first time, which was previously impossible with Smart Contracts. When smart contracts are utilized for the same goal, the transfer cannot be legally enforced.
• Ricardian contracts can help you save time, money, and effort when dealing with a disagreement. Machine-readable legal contracts, on the other hand, are not. The fundamental disadvantage of human-readable legal contracts is that they are susceptible to interpretation. Lawyers may interpret the material according to their preferences, which may lead to a quarrel.
• Ricardian Contracts are an important step toward increasing transparency in the blockchain network.
• Ricardian contracts demonstrate that there is room for convergence between the two models. Ricardian contracts can integrate blockchain and smart contract features to normal legal agreements, resulting in more transparency, lower costs and faster dispute resolution. In addition, from the standpoint of blockchain, the Ricardian contract provides a method for digitizing legal documents without losing any of their complexity and nuance.

Ricardian contract vs. Smart contract

There is some confusion on whether it is appropriate to compare a Smart contract with a Ricardian contract. Although they have certain parallels, they are distinct concepts in their way. So, while a Ricardian contract can be implemented as a smart contract, not every Ricardian contract is a smart contract. As a result, no basic smart contract is a Ricardian contract.

Smart contracts are a digital agreement that has previously been agreed upon and may be automatically implemented. Ricardian contracts adhere to the contract model, which records the “intentions” and “actions” of a specific contract, regardless of whether it has been performed or not. Ricardian contracts may relate to code as well as external documents by using hashes. There will be greater interaction between these sorts of contracts in the future, and transactions will most likely be done based on various hybrid forms.

Endnote

Ricardian Contracts are a strong new form of code that can substantially influence blockchain network trading, making it safer. It synchronizes the legal agreement and provisions of the contract with machine-readable code for execution on the blockchain network. Even though it is a decades-old concept, blockchain technology allows it to be utilized to its full potential. We can notarize these agreements, safeguard them on a blockchain platform, and retain a comprehensive record of the matter via blockchain. It can improve the clarity of legal contracts between several parties and save time, money, and effort by reducing the likelihood of conflicts. They may also activate functions and activities when combined with Smart Contracts.

If you wish to secure your blockchain transactions and trade with a legal contract, our experts develop blockchain-based legal digital agreements. For further guidance on Ricardian contract development, contact us.