Rewind to the 90s, when computers were becoming mainstream, and the likes of Steve Jobs and Bill Gates were hard at work trying to revolutionise the PC industry. Around the same time, a school student named Ian Grigg was also working on a concept — Ricardian Contracts — that would turn the financial world upside down. The catch? The technology of the era wasn't developed or sophisticated enough to bring his vision to fruition.
Three decades later, blockchain technology came into being, allowing Ian Griggs to introduce Ricardian Contracts to the world. In this article, we learn what Ricardian Contracts are, how they work, their advantages, limitations and their place in modern times.
What is a Ricardian Contract?
In simple terms, a Ricardian Contract is a legally binding smart contract that is readable to both computers and humans. In a way, it is putting a legally binding agreement on the blockchain. This allows Ricardian Contracts to reap the advantages of the judicial system's protection and the modernity of blockchain technology.
How do Ricardian Contracts work?
A Ricardian Contract begins as any other legal contract — you have a legal team that puts together the contract with its terms and conditions, and the parties agree to the contract. Then, you have a conversion process that uploads the contract to the blockchain, where it remains legally binding but with the added benefit of smart contract execution.
For instance, if you want to create a Ricardian Contract for the sale of a house, you get your legal team to draw out a contract. Then, the contract is uploaded on an applicable blockchain. Finally, both parties review and put in their digital signatures. Ta-da! The sale is complete.
Now you have a smart contract readable by both the parties involved and the blockchain. The agreement is still legally binding, and any possible smart contract functionalities can also be added to the Ricardian Contract.
How does a Ricardian Contract differ from a smart contract?
A Ricardian Contract differs from a smart contract in four major ways. First, a smart contract is meant for execution. Smart contracts are intended for cases where certain criteria terms need to be met and corresponding actions need to be executed, like online transfer of funds.
A Ricardian Contract, on the other hand, firstly records the legally binding agreement. That is the primary purpose. The execution part is an added advantage.
Second, a smart contract majorly codes. It can be read by computers and human geniuses who speak in code but not ordinary people. A Ricardian contract can be read and understood by people and machines — it is both in a human language and code.
Third, a smart contract is not legally binding. You can depend on it for your online transactions, but if things go wrong, you cannot go to a judicial authority with any claim. A Ricardian Contract, on the flip side, is legally binding. You have complete authority to approach a judicial body if things don't go by the agreement.
The last difference is in terms of versatility. A Ricardian Contract can also be a smart contract, but a smart contract can never be a Ricardian Contract. For example, you can have a Ricardian Contract that has smart contract functionality like automated execution and more. But you can never take a smart contract to court in search of justice.
Advantages of Ricardian Contracts
The biggest advantage of Ricardian Contracts is that they allow the legal transfer of assets over the blockchain. For everyone who had strayed away from the future of asset transfer (via blockchain), Ricardian Contracts give them a reason to get back into the realm and for the community to develop the ecosystem around it.
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The other advantage of Ricardian contracts is that they're not open to human interpretation. Lawyers have a reputation for interpreting contract lingo to their advantage, and the smarter lawyer gets the victory. With a Ricardian Contract, the contract is converted to code with no room for interpretation. This safeguards both parties, especially the party with honest intentions.
Limitations of Ricardian Contracts
The limitation of Ricardian Contracts today is the same as it was 30 years ago. The technology is there but has yet to be widely accepted/used enough for it to become mainstream. We still need a few blockchains to develop it to its best possible version before rolling it out to the masses. Moreover, anything related to blockchain today gets a very difficult 'one-and-only' chance. A bug here and there could result in a permanent goodbye.
The future of Ricardian Contracts
OpenBazaar is an online marketplace that uses Ricardian Contracts for asset transfers to avoid scams and provide legal protection to buyers and sellers. It is one of the few places where Ricardian Contracts are currently in full effect. For all the possibilities that Ricardian Contracts bring, they should be available everywhere, but that will take some time and effort from developers and marketers. Will they simplify our judicial system quite a bit? Yes. Will it take a long time for Ricardian Contracts to come into the fold? Also yes. But we're optimistic, as always.
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