What are Ricardian contracts?

A Ricardian contract is a legally binding digital agreement that defines the terms of interaction between two or more parties, is cryptographically signed and verified, and is readable by both humans and machines.

• Creator: financial cryptographer Ian Grigg.
• Date: In 1995 Grigg proposed the “Ricardo” payment system, a potential use case for Ricardian contracts. In creating Ricardo, Grigg drew on work by the American cryptography firm Systemics.

In 1998 Grigg presented Ricardian contracts in his paper “Financial Cryptography in Seven Layers”.

The payment system and contracts were named Ricardian after David Ricardo, the 19th‑century British economist who contributed to trade theory.

In 2015 Grigg published a paper introducing an approach to integrating smart contracts with Ricardian contracts.

Ricardian contracts bring smart contracts into business by enabling legally binding agreements of any kind.

• Details of the parties: who they are, how many, and their representatives.
• The contract’s term.
• Any exceptions to the terms.
• Any terms, exceptions and addenda can be added to the contract at any time.

Separating the subject of the contract from transaction execution

By means of a hash function, a Ricardian contract links legal prose to its digital dimension. All terms of the agreement are embedded in the contract, while the subject of transactions and their execution are kept strictly separate, strengthening safeguards. The contract records the parties’ agreement in a way that programs controlled by the parties can execute.

Hash reference

The offer is signed with a standard digital signature. The contract is accepted when consent is given to a transaction that references the contract’s hash. In a payment system, a guaranteed payment references the contract hash and identifies the payer and payee. The payment can be made via a mutual transaction or via a smart contract. In the latter case, the transaction is accepted on the basis of the smart contract’s code.

Hidden signature

The parties sign a Ricardian contract with their private keys. A signature from the contract provider is added to the document, creating a legally binding, clearly written offer tied to information in the document (for example, ownership).

If the parties later act under the contract (for example, to make a payment), the cryptographic hash identifier is transcribed from the original signed document. Using the agreement’s hash ensures the contract carries a hidden signature.

BowTie diagram

A Ricardian contract separates the agreement across time and scope and uses the so‑called BowTie diagram: a schematic of a legally binding contract that shows all its objectives.

By several measures, Ricardian contracts surpass smart contracts:

Legal status

A smart contract is not a legally binding document; a Ricardian contract is.

Purpose

A smart contract automatically enforces the terms of an agreement already struck; a Ricardian contract, as a legal document, sets out the parties’ intentions and the actions to occur in future.

Flexibility

A smart contract cannot function as a Ricardian contract; a Ricardian contract can also be a smart contract, automating actions via blockchain applications.

Readability

A smart contract is machine‑readable only; a Ricardian contract is readable by both humans and machines.

Scope

A smart contract is limited to simple use cases (such as financial transactions); a Ricardian contract can underpin legally binding agreements of any kind.

Ricardian contracts, in various forms, are used in the decentralised marketplace OpenBazaar and in R3’s Corda system.

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