What is Ricardian contract and why it could be the next big thing in blockchain?


Perhaps the most significant effect of the constant evolution and advancement of technology is that it inspires new ways of thinking and enables us to come up with revolutionary ideas that would have been unthinkable in a different technological landscape. But perhaps a less appreciated aspect of technology maturation and evolution is that it can breathe new life into old ideas. To make visionary concepts that have been conceived in the past, but may have at the time seemed like science fiction, possible.

Ricardian contract

We see those two sides of technology manifested clearly in the still-nascent field of blockchain and distributed ledger technologies (DLT). On the one hand, it has inspired new types of services and applications, such as flash loans and yield farming. On the other hand, blockchain developers are finding ways to utilize concepts that likely seemed impractical in the pre-blockchain technological landscape. Concepts like smart contracts and the subject of this article, the Ricardian contract.

What is a Ricardian contract?

As we hinted above, the Ricardian contract is an old concept that predates the invention of blockchain technology and by quite a bit. It was first proposed by programmer Ian Grigg in 1996 as part of the Ricardo Payment System. The concept described a new type of legal document readable by both humans and machines. A Ricardian contract is written using a combination of legal prose – perfectly understandable to lawyers and even ordinary people – and a markup language that allows for the defining elements of the agreement to be expressed in a machine-readable format that can be executed by a computer program. The written contract is then digitally signed by the parties involved and cryptographically verified.

While revolutionary, the concept didn’t get much traction when it was first introduced, because the technology available at the time was not sufficient to unlock its full potential. However, this is no longer an issue, thanks to the advent of blockchain technology, which seems to have everything to make the most of the idea.

In the context of blockchain technology, a Ricardian contract is a type of smart contract that is readable by both humans and machines. In essence, Ricardian contracts offer a convenient way to merge the world of legal agreements and blockchain technology. Now, let’s take a closer look at how they work.

How does a Ricardian contract work?

At the heart of a Ricardian contract lies a human-readable legal agreement between two or more parties. That part of the contract needs to be written preferably by lawyers and in accordance with laws, rules, and regulations of a particular jurisdiction. Once the legal framework has been agreed upon and signed by the parties involved, the contract is then signed and stored on a blockchain. Subsequent transactions refer to the contract’s hash.

Notably, Ricardian contracts are live contracts, meaning that they can be changed to reflect the outcome of stipulated events. This allows the contract to execute different events based on the outcome of prior events.

Ricardian contracts vs smart contracts

The blockchain space is already quite accustomed to smart contracts, a type of self-executing piece of software that on the surface seems to resemble Ricardian contracts quite a bit. And indeed, all Ricardian contracts are also smart contracts. However, smart contracts are not Ricardian contracts.

The main difference between the two is that, despite their name, smart contracts are not legal documents, unlike their Ricardian counterparts. Rather, they are a mechanism for ensuring trust and automating operations in blockchain-based systems. As such, they are written in code and don’t need to be human-readable. In contrast, the main purpose of Ricardian contracts is to define the contractual relationship between two or more parties and can be used outside a blockchain.

Benefits of Ricardian contracts

Providing a legal framework

Whereas a smart contract is essentially a set of instructions on how to execute certain actions based on whether certain requirements have been met, a Ricardian contract also provides the legal framework that underpins all subsequent transactions that may occur under the contract. It defines the parties in the agreement, the possible legal implications, and the relevant legislation that can be used in case of a dispute.

Legally binding

Even though smart contracts are a clever piece of technology that is perfectly in line with the trustless nature of blockchain, they are not without limitations. One such limitation is that they do not have the power to resolve disputes and outside a blockchain-based system. They are not legally binding. This is where Ricardian contracts shine, as they are legally binding and can be used in court. This provides another level of security against fraudulent activities and can help legitimize blockchain technology in the eyes of regulators and governments across the world.

Versatile instruments

Blockchain technology is often seen as an uncompromising alternative to the current trust-based models and such views are entirely justified. One of blockchain and DLT’s main goals is to build systems where third-party oversight is replaced by impartial network consensus governed by software code. The “code is law” mantra perfectly describes the overwhelming sentiment within the blockchain community.

However, Ricardian contracts are proof that an opportunity for intersection between both models exists. Ricardian contracts can add blockchain and smart contract functionality to standard legal agreements, which can result in enhanced transparency, reduced costs, and time optimizations when resolving a dispute. And from a blockchain perspective, the Ricardian contract offers a way for digitizing legal documents without losing any of their richness and nuance.

The best of both worlds

Despite their versatility, Ricardian contracts are not going to be the optimal solution for each scenario. If the automation of a system, for example, is the primary objective, traditional smart contracts will likely be the better option. But if you want to access the benefits of both the traditional and the trustless, blockchain-based model, Ricardian contracts might just be the thing you need. In this way, Ricardian contracts have the potential to considerably broaden the range of possible blockchain applications.