Back in 1994, even before Bitcoin was a thing, Nick Szabo introduced the world to smart contracts. Fast forward to ten years later, Vitalik Buterin gave the world Ethereum, which was a public blockchain built on smart contracts. Automating contracts using code has risen in popularity over the years as the world embraces the power of Distributed Ledger Technology (DLT).
Many companies around the world, especially in the supply chain industry, have embraced smart contracts to improve efficiency and collaboration between different players. Smart contracts are the backbone of the Ethereum blockchain, and it’s part of the reason for the ICO boom some years back and more recently the IEO boom. Since blockchain allows transparency and traceability of transactions at any time, having a smart contract is justifiable.
Despite the immense benefits of smart contracts, people still found it necessary to draft written legal contracts. Due to this limitation, Ricardian contracts have stepped in to link the human element of contracts with the cryptographic nature of blockchain. While it’s possible to implement a Ricardian contract as a smart contract, not all Ricardian contracts are smart contracts and vice-versa.
That said, there’s been a lot of debate in the crypto space on whether Ricardian contracts are actually smarter than smart contracts. In this analysis, we take a critical look at the two types of innovative contracts and assess the role of each in the world of blockchain.
What are smart contracts?
In the simplest of terms, a smart contract is an open-source code that self executes when conditions set by both parties are met. The concept was brought forward by computer analyst, Nick Szabo and later refined by Ethereum. Using smart contracts, people can exchange things such as money, properties, among others, securely and transparently.
When introducing the world to smart contracts almost over 20 years ago, Szabo stated,
‘’New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts “smart” because they are far more functional than their inanimate paper-based ancestors.’’
Use cases of smart contracts
Since smart contracts employ blockchain technology, their use case is unlimited. The digitized Uniform Commercial Code filling in a smart contract makes it ideal for storing records. In supply chain management, smart contracts have changed the game and improved efficiency for all the parties involved. Eric Piscini, the global blockchain leader at Deloitte, when commenting about the relationship between supply chain and blockchain, stated,
‘’Supply chains across industries and countries will be reimagined, improved, and disrupted by blockchain technologies.’’
Currently, smart contracts are being used on Decentralized Finance (DeFi) projects, which have become extremely popular lately. However, Vitalik Buterin, the founder of Ethereum, has warned crypto enthusiasts about underestimating the risk of smart contracts concerning DeFi.
The desirability of smart contracts
Smart contracts are highly desirable due to their immense strengths. Since they employ the Internet of Things (IoT) concept they come with several benefits. The most notable upsides are:
- Complete transparency – All information is a smart contract that is visible to all the parties involved. Since the code is prepared before the contract is enforced, there’s no chance of any of the parties tampering or altering the information in it.
- Fast implementation – The autonomous nature of these contracts eliminates the need for a third party, which ensures fast execution of the programmed code.
- Permanent records – Every single detail of a smart contract is permanent and can’t disappear or be lost. Since smart contracts are backed up on the blockchain, there will always be a permanent record of information.
That said, critics have questioned the ‘smart nature’ of smart contracts. For example, the immutability nature of smart contracts ensures that they are tamper-proof. However, when the contractual relationship between the parties comes to an end, the contract remains on the blockchain unless it’s programmed with a ‘self-destruct’ option.
Additionally, the rigid nature of the contracts means that certain behaviors that often come up post-signing can’t be regulated. Lawyers argue that there should be room for flexibility of counterparty performance for issues that weren’t predicted during the contract negotiation phase.
Enter Ricardian Contracts
In 1995, Ian Grigg, a famous programmer, used the Ricardian principle to develop a contract that was a legal document but could be cryptographically signed. All information in the Ricardian contract is placed in a legal document but secured using cryptographic identification, which makes them readable by both human beings and machines.
Since a Ricardian contract is written in legal prose, it’s flexible, and in case of a dispute, the parties can approach a court of law for settlement. These contracts have been dubbed ‘second-generation smart contracts.’
Use cases of Ricardian contracts
The first application of Ricardian contracts was by OpenBazzar, which is a P2P e-commerce platform. The platform uses the concept to verify the legitimacy of the agreement made between a buyer and a seller. Another major platform that’s using Ricardian contracts is the EOS blockchain, which forms a vital part of the agreements. Ian Grigg is a partner at block.one, the company behind the EOSIO blockchain.
Enigio, a digital solutions provider, has also embraced the concept of Ricardian contracts. The platform’s patented innovation dubbed trace:original, that is digitizing paper contracts such as bills of exchange, promissory notes, airway bills, among others. Enigio has joined hands with the International Trading and Forfaiting Association (ITFA) to use the advanced technology to digitize negotiable instruments. The concept revolves around the idea of Ricardian contracts whose cryptographic nature authenticates such instruments.
While commenting about the initiative, Andre Casterman, the chairman of ITFA, stated,
“The aim of the ITFA DNI Initiative is to fully digitise bills of exchange (B/E) and promissory notes (PN). In order to achieve this, we identified the need to combine advanced document technology with electronic signatures and distributed ledger technology (DLT) whilst developing the appropriate contractual schemes, and where needed, lobby to change the law.”
Benefits of Ricardian contracts
The greatest strength of Ricardian contracts is that for the first time, people can have legally enforceable contracts while still enjoying the perks of being on a blockchain. The other strength of Ricardian contracts is that they save time and costs when a dispute arises. Since the agreements made are machine-readable, they can’t be misinterpreted. Better yet, Ricardian contracts allow more transparency on the blockchain.
So, are Ricardian Contracts smarter?
The immense benefits of smart contracts can’t be underestimated. They have been a revolutionary platform for blockchain technology and have opened up cryptography to the world. However, the world of technology is always changing. For example, recently, scientists used quantum entanglement to send an encrypted message. The discovery made some in the space feel this could be the next big thing in the world of cryptography.
The point is, current systems are always being improved. Ricardian contracts offer flexibility on how people get into agreements. It allows for agreements to be pre-defined and pre-arranged. However, there’s no wide-scale application of Ricardian contracts, and a lot needs to be built on top of its infrastructure to ensure its smooth implementation.
In summary, Ricardian contracts have proved that contractual agreements can be automated without limiting parties to self-executing instructions.
The future of smart contracts
Many fields can be disrupted using smart contracts, such as voting, health care, and the property market. Though the concept still faces many challenges, many projects are investing in research to make smart contracts more secure and less challenging to ordinary users.
For example, Etherparty has invested in research on how to overcome any challenges that users on the platform may be facing. Some experts believe that the true potential of smart contracts is yet to be achieved. Only time will tell.