As we continue to explore the blockchain world, several conspicuous notions crop up with each passing day. Perhaps by now, you’ve heard of the term “smart contracts” being thrown around blockchain forums. However, before the dust settles on the massive potential that smart contracts offer, there is another kid on the block – Ricardian contracts.
So, what is the difference between the two? Are Ricardian contracts taking over from smart contracts? Read on for detailed information on the two innovations.
The history of contracts
From time immemorial, contracts were signed to ensure that each party involved in the deal/business gives and receives exactly what they bargained for. However, there is nothing wrong with the traditional contracts. But, remember that they are written in human language. So, they are susceptible to misinterpretations.
Lawyers can take advantage of the ambiguity of human language and build escape routes within different clauses of the contract.
Furthermore, parties can understand some provisions within the contract differently, which can be disastrous.
More often, such cases end up in judicial systems, which can be time-consuming and costly. Smart contracts were designed to eliminate any ambiguity or linguistic interpretations.
Understanding smart contracts
Even before blockchain came into the limelight, smart contracts were already in use. The idea was coined by a cryptographer and computer scientist Nick Szabo in mid-1990s. He defined a smart contract simply as a computerized transaction protocol used to execute the terms of a contract.
The main aim is to satisfy common contractual conditions by determining the relations and obligations between the involved parties through computer codes and automatic administration.
However, smart contracts are used today to enhance a smooth exchange of money, shares, property, or any valuable item or service in a transparent and non-conflicting manner.
In other words, smart contracts ensure trust, a crucial factor in a decentralized blockchain ecosystem where parties are kept anonymous.
Notably, Ethereum has popularized smart contracts in its network, and there are several benefits to that.
A smart contract is:
It also saves costs and eliminates the need for third parties or escrow agents.
Understanding Ricardian contracts
Ian Grigg, a financial cryptography expert, coined the idea of Ricardian contracts in late-1990s. He based his innovation on the concept of asset transfer system developed between 1995 and 1996 by David Ricardo.
However, the design was credited to Ricardo owing to his massive contribution to the international trade theory.
A Ricardian contract is defined as a digital transaction protocol that describes the terms and conditions of an association of two or more entities. Moreover, it is cryptographically signed and verified. The contract is readable and signed by both humans and machines.
The implementation of a Ricardian contract may vary since it registers a legally valid document to a certain value or object that is digitally connected. The information stored in a contract is in a format that can be executed by software.
That way, it acts as a legal document between parties as well as a protocol that integrates an agreement. It maintains high levels of security through cryptographic identification.
The outstanding characteristics of Ricardian contracts include:
- Human parsable
- Printable documents
- Program parsable
- Signed by issuer
- All documents are manifestly equivalent, whether it is parsed, displayed, or printed.
- Can be identified securely, and any attempt to alter the contract and reference linkages is thwarted.
Why Ricardian contracts are edging out smart contracts
A smart contract takes a very simple approach. For instance, you want to sell your property. The moment a willing buyer sends money to your account, the ownership of the house is automatically transferred to the buyer.
However, a Ricardian contract goes a notch higher and considers different aspects of the contract.
For example, it could first verify if you truly own the house, and this is achieved through an Oracle verification entity.
Secondly, when you receive the money in your account, the Ricardian contract will check if you had any pending mortgage on the house and ensure that the bank pays it up. That way, a logical conclusion is reached in the entire process.
OpenBazaar was the first application to implement Ricardian contracts. It’s a peer-to-peer e-commerce platform. There, users can trade literally anything while ensuring the legitimacy of the agreement between the seller and the buyer.
The EOS network has followed suit to incorporate Ricardian contracts in any agreement made on the EOS blockchain.
It is obvious that the real killer application on the blockchain ecosystem is the Ricardian contract. Nowadays, many organizations are increasingly embracing data-driven collaborations. Ricardian contracts will enhance fast, secure, and efficient transactions. Moving into the future, we will witness more implementation of Ricardian contracts, especially now that the integration with EOS network is a success.