What are Ricardian contracts?

1. What are Ricardian contracts?

A Ricardian contract is a legally binding digital contract defining the terms of interaction between two or more parties, which is cryptographically signed and validated, and can be read by both humans and machines.

2. Who created Ricardian contracts and when?

  • Creator: financial cryptography specialist Ian Grigg.
  • Creation date: In 1995, Grigg came up with the concept of the Ricardo payment system, which is one possible use case for Ricardian contracts. In creating Ricardo, Grigg drew on the developments of the American cryptographic company Systemics.

In 1998, Grigg introduced Ricardian contracts in his paper “Financial Cryptography in Seven Layers.”

The payment system and contracts were named Ricardian in honor of a contribution to the theory of international trade made by the 19th century British economist David Ricardo.

In 2015, Grigg published a paper in which he introduced the concept of integrating smart contracts and Ricardian contracts.

3. What are Ricardian contracts for?

Ricardian contracts enable the use of smart contract technology in business, to enter into legally binding agreements of all types.

4. What information do Ricardian contracts contain?

  • Information about the parties to the contract: who they are, their number, their representatives.
  • Information about the term of the contract.
  • Information about exceptions to the terms of the contract.
  • Any terms, exceptions and additions can be added to the contract at any time.

5. What are the features of Ricardian contracts?

Separation of the subject matter of the contract and the execution of transactions

Through the hash function, the Ricardian contract forms a link between the legal wording and the digital dimension. All the terms of the agreement are integrated into the contract, with the subject matter of the transactions and their execution strictly separated, which strengthens the protection. The contract approves the parties’ agreement so that programs controlled by the parties can execute the agreement.

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Hash Reference.

An offer to enter into a transaction (an offer) is signed with a common digital signature. The contract is accepted when the consent to the transaction referencing the contract hash is given. In the case of a payment system, a guaranteed payment refers to the hash of the contract as well as to the payer and payee. The payment can be made through a reciprocal transaction as well as through a smart contract. In the case of a smart contract, the transaction is accepted based on the smart contract code.

Concealed signature.

The parties to the agreement sign a Ricardian contract using private keys. The contract provider’s signature is added to the document, which creates a legally binding and legibly written sentence in connection with the information (e.g., ownership) in the document.

If the parties to the agreement subsequently participate in the contract (e.g., want to make a payment), the cryptographic hash identification method is overwritten from the original signed document. The use of the agreement hash ensures that a hidden signature is attached to the contract.

BowTie diagram.

A Ricardian contract separates the parties’ agreement by time and scope and uses what is known as a BowTie diagram: a diagram of a legally binding contract showing all of its purposes.

6. How is a Ricardian contract different from a smart contract?

Ricardian contracts are superior to smart contracts in a number of ways:

The legal aspect.

A smart contract is not a legally binding document; a Ricardian contract is legally binding.

The purpose of the agreement

A smart contract automatically enforces the terms of an agreement already made; a Ricardian contract, in the form of a legal document, sets forth the intentions of the parties to the agreement and the actions of the parties that will occur in the future.

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Flexibility

A smart contract cannot function like a Ricardian contract, which can also be a smart contract by automating actions through blockchain applications.

Accessibility

A smart contract is only readable by machines; a Ricardian contract is readable by both humans and machines.

Scope

The smart contract is limited to a simple use case (financial transactions); the Ricardian contract can be used to enter into legally binding agreements of all types.

7. Where are Ricardian contracts used?

Ricardian contracts in various forms are used in the work of the OpenBazaar decentralized marketplace and R3’s Corda system.

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