What is a Ricardian Contract?
With traditional contracts, businesses and organizations become vulnerable to fraud and ambiguity. To minimize the risks that the businesses would incur with the human-readable manual contracts, smart contracts have been invented. Smart contracts are blockchain-based that function as digital contracts. They are unalterable in nature and lay precise codes of agreements for businesses to function. Smart contracts are machine-readable and are created using automatic computer codes.
Even though smart contracts are self-executing real-time contracts with autonomous validation and decentralized in nature, they still cannot be read by humans as they are written in automated computer codes. Businesses these days demand a contract that is both machine and human-readable to avoid the risk of getting scammed. The inefficiency of traditional contracts considering the human-readability factor gave rise to the invention of a contract known as Ricardian Contracts. This article will unfold the concept of Ricardian Contracts and their importance in Blockchain technology.
What is a Ricardian Contract?
The concept of the Ricardian Contract was initially given by Ian Grigg in 1995, who was one of the founding pioneers of financial cryptography. Ricardian Contracts link different parties in a legal agreement via cryptographic signatures. A Ricardian contract functions legally and digitally linking documents with specific values/objects related to the exchange/trading process between two parties. Ricardian contract converts all the data in a legal context which is in software-executable format. This legally puts both the parties in a safe agreement with a set of terms to be followed in the trade along with high security via cryptographic identification.
The basic advantage of a Ricardian Contract is that it serves both as a human and machine-readable contract. The Ricardian Contract can be hashed once on the blockchain and can be kept on the chain for the future too. This also speaks of the contract’s uniquely identifiable components.
What are the various components of a Ricardian Contract?
Ricardian Contract contains everything that is required to code a legal contract among various parties. It contains all the terms and conditions that need to be met while running the contract. A Ricardian Contract has the following fundamental components:
Parties
This states the various parties involved in the trade agreement are bound to follow all the set terms of the Ricardian Contract.
Time as an element
This talks about the legality of the contract stating the contract’s validity concerning its set or indefinite time. Time element specifies the time, for how many months it is valid and when it will expire.
Exceptional Clauses
Exceptional Clauses mention terms for rare cases like what happens if one/both the parties die or what happens if there are any mishaps.
Conditions
These are conditions that are open to alteration and in them, you can add any clause of your own choice with the agreement of both parties.
Ricardian Contracts are an innovative form of legal contracts that will eventually influence blockchain trade, making it secure. It regulates the legal agreement and terms of the contract with machine-readable computer codes for execution on the blockchain platform. Even though it is an old concept, blockchain technology permits the use of Ricardian contracts to their complete potential. In a real-world use case, you can notarize these contracts, monitor them on a blockchain network, and extract comprehensive data of the contract trade using blockchain. It improves the vision of legal contracts between different parties, is time-friendly and is economically feasible.
