Why Ricardian contracts, not Smart Contracts, are Blockchain’s Killer Application

Smart contracts have been dubbed the killer application of distributed ledger technology. Within every industry, smart contracts will provide significant efficiency benefits. They will reduce transaction times between stakeholders from weeks to minutes or seconds. Especially within global supply chains, smart contracts will kickstart data-enabled collaboration. They can offer trust, provenance and security while enabling instant transactions.

Smart contracts may seem revolutionary, but they are nothing new. In fact, they have been around for a long time. Smart contracts are already in place in most modern office buildings. For example, access cards that determine whether you are allowed entry to a certain area are pre-defined by a piece of code and linked to a database. The only difference now is that when they are deployed on a blockchain, they become immutable, remain accessible indefinitely and will carry out their pre-defined tasks whenever certain conditions are met. That is the revolutionary part of blockchain-enabled smart contracts.

Smart Opportunities for Society

Smart contracts offer tremendous opportunities for organisations. Organisations that deploy smart contracts to facilitate inter-organisational transactions become more intensely connected since they share the same database across time and space. In the coming years, we will likely see a wide variety of applications using smart contracts that will change how we work, how we do business, and how we run our daily lives. This will increasingly take away the middleman, managers, and employees.

As such, smart contracts will have a direct impact on social contracts within societies and organisations. This is because smart contracts automatically and autonomously execute. Smart contracts remove the need for developing, implementing or evaluating decisions by management or employees.

When multiple smart contracts are combined, together with artificial intelligence and analytics, it becomes possible to automate decision-making capabilities. This will result in a completely new paradigm of organising activity and can result in new organisational designs that are completely run by computer code, so-called Decentralised Autonomous Organisations (DAOs).

However, there is one problem with existing smart contracts: they are not legally binding. Any organisation can create a smart contract and record them on a blockchain. Although they will execute automatically, it does not say anything about their legal validity. After all, a smart contract is only the result of an agreement put into code. It is not the agreement itself.

What Are Ricardian Contracts?

As a result, in 2018, there has been a renewed interest in Ricardian contracts. This type of contracts differs from smart contracts that they are legally binding. It records the agreement between multiple parties in human-readable and machine-readable text. This means that it is a legal contract that is easy to read and understand by everyone, so not only your lawyer.

Ricardian contracts were first introduced by Ian Grigg, one of the earliest pioneers in financial cryptography, in 1995. Ricardian contracts use cryptographic signatures to bind different parties into a legal agreement. They will automatically execute when certain pre-conditions have been met. Ricardian contracts not only define intentions but also execute instructions automatically.

The main advantage of a Ricardian contract is that if there is a dispute among parties involved, the case can be decided in court. This is not possible with smart contracts, which are only the instructions based on what is defined in an agreement. If something goes wrong, proving a scam or fraud in court is difficult since a smart contract is not a legally binding agreement.

Another benefit of a Ricardian contract is that once a human-readable agreement is turned into a machine-readable agreement, it can be hashed. The hash can then be stored on a blockchain. This would ensure that each part of the document can be uniquely identified by its hash and it becomes impossible to change the original agreement without the other parties knowing. As a result, Ricardian contracts are extremely secure.

More importantly, there is no legal framework with smart contracts. As a result, if an unexpected event occurs, smart contracts lack the ability to evolve as there are no guidelines on how to proceed. Ricardian contracts, on the other hand, do come with a legal framework and this adds clarity for all stakeholders. This means that, contrary to smart contracts, you require lawyers to create and deploy a Ricardian contract.

How Would a Ricardian Contract Work?

A smart contract is typically very simple. If I decide to sell my house to you, the moment I have received the funds, automatically the ownership of my house will transfer to you. A Ricardian contract, however, will go a lot further and incorporate different aspects to an agreement.

For example, a first step could be to check if I truly own the house. If a verified entity (an Oracle) confirms that I do, the Ricardian contract will move to the next step. Another additional step can be that the moment I receive the funds, automatically the bank can use them to repay my mortgage. A Ricardian contract executes multiple events resulting in a logical conclusion (in this case that I have sold my house and repaid my mortgage).

The first application to implement Ricardian contracts is OpenBazaar, a peer-to-peer e-commerce platform where you can trade almost anything directly with each other. OpenBazaar uses Ricardian contract to check the legitimacy of an agreement between buyer and seller. Within the platform, they are called Trade Receipts, and it adds additional security that all parties do the right thing. In case of fraud, there are legal records that can be used in court to settle the dispute.

Apart from OpenBazaar, also the EOS network is using Ricardian contracts to form an important part of any agreements made on the EOS blockchain. Ian Grigg is even a partner at block.one and it seems that they have big plans for further incorporating Ricardian contracts.

The Future of Ricardian Contracts

Smart contracts are widely regarded as the killer application for blockchain, but the real killer application will be Ricardian contracts. Especially, when organisations are increasingly moving towards data-driven collaboration, Ricardian contracts will become a pre-requisite for fast, efficient and secure transactions. With the successful integration within the EOS network in the coming years, we will see more implementations of Ricardian contracts in decentralised applications. That will be beneficial for all involved stakeholders.

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