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Invented in 1995 by one of the pioneers in the field of financial blockchain, Ian Grigg, Ricardian Contracts place the terms and conditions of a contract in a format that can be understood and executed by both software and humans. While machines read Ricardian Contracts within digital infrastructures, humans read them as plain text documents. A Ricardian Contract is legally binding and uses cryptographic signatures to bind different parties to the contract. Ricardian Contracts not only help digitize assets but also offer a higher level of security.

Ricardian Contracts: How do they work?

A Ricardian Contract is written with legal prose and is later hashed to help machines understand the language. The process for creating a Ricardian Contract is pretty much the same as a standard legal contract, the parties to the contract come up with terms and agreements and once all the stakeholders have gone through the contract and agreed to the terms and conditions, the final draft is prepared. The last step involves digitizing or ‘hashing’ the contract. Once the contract is hashed, it can be run by a blockchain platform.

Ricardian Contracts are live contracts, meaning they can be changed after an event. For enhanced security, Ricardian Contracts use hidden signatures. The parties involved use secure keys to sign the contract. The hash of the contract is used to attach the hidden signatures to the contract.

Key Benefits

1. Legally Binding

Unlike smart contracts, Ricardian Contracts are legally binding, meaning that if a dispute arises between the parties to the contract, the case can be taken to court. Because a Ricardian Contract is a mirror image of the physical contract, ‘evidence’ are permissible in a court of law.

2. Transparency and Security

After a human-readable contract is converted into a machine-readable agreement, it is hashed. The hash is stored on a blockchain and can verify each part of the contract, making it almost impossible for any of the parties involved to change the contract without the consent of other parties to the contract.

2. Clarity

A major drawback of smart contracts is that they lack a legal framework. If an unexpected event occurs, it becomes very difficult for the parties to a smart contract to come up with a solution. Ricardian Contracts, on the other hand, include a legal framework that can be used to resolve disputes and confusions.

The Road Ahead

With an improvement in technology, we can expect more businesses to start using Ricardian Contracts, for example they have already been integrated within the EOS network, meaning they will be an important part of agreements made on the EOS blockchain.

As organizations move towards data-driven collaboration, Ricardian Contracts can help them save time and efforts and avoid legal hassles when digitizing assets. Because they can play the role of smart contracts, Ricardian Contracts can replace them in the future. Unlike smart contracts that are primarily used for financial transactions, Ricardian Contracts can be used for any type of agreement.

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