Introduction to Ricardian Smart Contracts for Manufacturing

What is a Ricardian Contract?

A Ricardian contract is a legally binding agreement on the blockchain. It is an ordinary text document that is readable by both humans and machines. This type of contract was conceived in the 1990s by Ian Grigg, a blockchain and cryptocurrency expert. The key to a Ricardian contract is that software must be able to execute the legal information contained in the document. The software integrates the legal agreements within digital infrastructure using cryptographic identification. By weaving computer language and plain-text language together, all parties involved enjoy the following benefits over a traditional written contract:

 

  • Lower transaction costs (no escrow or third-party payment fees)
  • Easier execution of agreements
  • Faster resolution of disputes

 

The point in using Ricardian smart contracts is to increase transparency and minimize the risk of fraud. In traditional written contracts, the language is prone to ambiguity, leading to different interpretations. Ricardian contracts strive to minimize this ambiguity by integrating their language with the digital framework, not leaving any room for different linguistic interpretations or allowing any party to wiggle their way out of their contractual obligations. The language must be legible to both humans and software, and must be digitally signed by all parties using digital (cryptographic) keys in combination with a secure and unique identification method.

How Are They Different From Regular Smart Contracts?

A blockchain-based smart contract is a self-executing and auto-enforcing contract that makes it possible to transparently exchange money or digital assets. Smart contracts are immutable, tamper-proof, and removes the need for third-party intermediaries. These are useful when two or more parties have already agreed on the terms, in which case they could create a smart contract to automatically execute once the pre-agreed conditions have been met.

 

Some Ricardian contracts can also be smart contracts, and thus are referred to as “Ricardian Smart Contracts”. Ricardian contracts, on the other hand, record the intentions and actions of all involved parties whether or not the contract has been executed. So unlike smart contracts, Ricardian contracts are not limited to use in simple circumstances like financial transactions. These contracts can serve as both a legal agreement between parties and a digital protocol that secures that agreement using cryptographic identification. They can be readable as plain text, parsable by software, and signed by all parties involved.

How Are They Used in Manufacturing?

In the manufacturing ecosystem, many agreements are signed between businesses, suppliers, and manufacturers. These agreements could be constructed as Ricardian Smart Contracts, which bind manufacturers, suppliers, transporter agents, and digital services into a legal agreement. Instead of using a simple smart contract based on Ethereum, a Ricardian smart contract is preferred in manufacturing because it can accommodate higher transaction throughput and also have the flexibility to adapt to different industrial sectors. For these contracts to be digitally executable, the contract schema needs to contain terms and conditions formatted in JSON with attribute-value pairs. This allows higher throughput and more flexibility, which is essential because businesses need to supply detailed product specifications, blueprints, or design files to manufacturers within an agreement.

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