What are Ricardian contracts?

The Ricardian contract is a legally binding digital contract that defines the conditions for the interaction of two or more parties, which is cryptographically signed and confirmed, and is read by both a person and a machine.

Who created the Ricardian contracts and when?

• Creator: Financial Cryptography Specialist Ian Grigg.
• Creation date: in 1995, Grigg put forward the concept of the Ricardo payment system, which is one of the possible use cases for Ricardian contracts. Creating "Ricardo", Grigg relied on the development of the American cryptographic company Systemics.

In 1998, Grigg introduced Ricardian contracts in his work, Financial Cryptography in Seven Layers.

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

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

What are Ricardian contracts for?

Ricardian contracts allow the use of smart contract technology in business to conclude legally binding agreements of any type.

What information do Ricardian contracts contain?

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

What are the features of Ricardian contracts?

Separation of the subject of the contract and execution of transactions

Through a hash function, the Ricardian contract forms a link between legal formulations and the digital dimension. All conditions of the agreement are integrated into the contract, while the subject of transactions and their implementation are strictly separated, which enhances protection. The contract approves the agreement of the parties so that the programs controlled by the parties can fulfill the agreement.

Hash reference

The offer to conclude a transaction (offer) is signed by a conventional digital signature. A contract is accepted when consent is given to a transaction that refers to the hash of the contract. 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. Payment can be made through a mutual 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.

Hidden signature

The parties to the agreement sign the Ricardian contract using private keys. The signature of the contract provider is added to the document, which creates a legally binding and legibly written proposal in connection with the information (for example, property) in the document.

If the parties to the agreement subsequently participate in the contract (for example, want to make a payment), then the cryptographic method of hash identification is rewritten from the original signed document. Using the hash of the agreement ensures that a hidden signature is attached to the contract.

BowTie Chart

The Ricardian contract shares the agreement of the parties in time and sphere and uses the so-called BowTie diagram : a legally binding contract diagram showing all its objectives.

How is a Ricardian contract different from a smart contract?

In a number of ways, Ricardian contracts outperform smart contracts:

Legal aspect

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

Purpose of the agreement

A smart contract automatically fulfills the terms of an already concluded agreement; The Ricardian contract in the form of a legal document sets out the intentions of the parties to the agreement and the actions of the parties that will take place in the future.

Flexibility

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

Availability

The smart contract is readable only by machines; The Ricardian contract is readable by both people and cars.

Scope of application

A smart contract is limited to a simple use case (financial transactions); The Ricardian contract can be used to enter into any type of legally binding agreement.

Where are Ricardian contracts used?

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