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Ricardian Contracts and Blockchain: A Powerful and Winning Combination
In this article, we will explore how Blockchain provides an opportunity to simplify the complex world of contract management. Key value adds for your organization will be discussed. One exploratory use case (cold chain tracking) is shown to help envision the practical application of the Blockchain enabled Ricardian Contracts.
What are Ricardian Contracts?
*As first envisioned by Ian Grigg, inventor of Ricardian Contracts, a Ricardian Contract can be defined as a single document that is a) a contract offered by an issuer to holders; b) for a valuable right held by holders, and managed by the issuer; c) easily readable by people (like a contract on paper); d) readable by programs (parsable like a database); e) digitally signed; f) carries the keys and server information; and, g) allied with a unique and secure identifier.
This document has to be readable by people and parsable by programs. The Ricardian Contract is formatted as a text file that can be easily read (displayed or printed), and programs can convert it into internal forms for searching for name-value pairs. It includes a special section for each type of contract, such as bond, share, currency, etc.
What’s the Value Add with Blockchain?
Below are four value add characteristics with Blockchain: (1) Dispute Resolution; (2) Automation and Simplification; (3) Comparative Cost; and, (4) Storage Vault offered with Blockchain. This list is not all inclusive; but, it highlights why Blockchain and Ricardian contracts can be an elegant and powerful solution.
Dispute Resolution: There will always be a need for human interaction with any contracting process as disputes arise that are outside the ability of predefined code and algorithms to process when executed. If the purpose and outcome of the code has been properly developed, then this human interaction should be more of an outlier rather than an ordinary part of the process.
A couple of ways that Blockchain provides dispute resolution are linkage and proactive dispute elimination.
- Linkage uses Blockchain’s capability to provide linkage between a written (natural language) contract and the “Smart Contract” automated execution of the contract. Blockchain also provides the mechanism by which completion of the actual stipulations can be monitored and validated by all parties.
- Proactive dispute elimination is carried out through the inherent interactions of stakeholders when designing Smart Contracts. Smart Contracts and their associated processing will have been reviewed and agreed to by all stakeholders. This review and approval process facilitates a proactive approach to eliminating potential areas of dispute before they can occur.
Blockchain for the Cold Chain?
One example we can consider is resolving disputes when temperatures are exceeded during transit in a cold chain scenario. Blockchain’s core features of immutability and decentralized trust in conjunction with Smart Contracts will monitor, evaluate, and provide the resolution when a temperature breach is identified in the system. This resolution could be an automated implementation of a fine from an escrow account; could serve as a simple warning; or, any number of other resolutions depending on the agreed upon contract stipulations. On the other hand, a benefit offered by this process is automatically applying bonuses to companies that maintain an agreed upon level of service of temperatures during transit.
Automation and simplification: The concept of linkage between natural language contracts and execution of the representative Smart Contract provides an additional benefit of automatically “reflecting” what was stated in the natural language contract. The “reflection” is then captured and processed in the Smart Contract.
Workflow based design and configuration capabilities provide another critical capability to greatly simplify reflect natural language contracts in a Smart Contract. Simplification is provided as automated workflows that provide wizards and other tools to guide the person through configuring the setup.
Comparative Cost: In general, Blockchain enabled Ricardian contracts, should provide excellent value for the organization’s investment in Blockchain (months instead of years). Determining the cost take out from implementing Blockchain-enabled Ricardian contracts depends on the granularity required to justify the business case. Metrics and spend related to current labor use, process time, delays, quality errors etc. will need to be included in your analysis. Actual licensing, software maintenance, and cloud costs need to be calculated as well. It is recommended to use current, projected 3-year, and projected 5-year time horizons when calculating the financials.
Storage Vault: Even with the most well planned, designed, and executed Ricardian contract system, disputes will eventually arise. When these disputes arise, there will be times (hopefully few) that the dispute occurs well into the life cycle of the contract. A large issue arising from a long delay between execution of a contract and a dispute coming into play is the loss of institutional memory caused by employee movement resulting from moving to different parts of the organization, leaving to find new employment, etc. Included in this issue is the loss or misplacement of supporting documentation and material.
Blockchain (and associated technological components) provides a storage vault wherein all electronic documents including video, images, audio, smart contracts, testing results and more can be stored as an electronic package. With proper architecture strategies, this package can be stored in an easily recallable state for many years (possibly centuries). Benefits of this Storage Vault include: (1) no information degradation, files remain in the exact condition they were in when entered to the Storage Vault; (2) immutable state of the files indicating that even if one character has been changed in a 10GB package, the Blockchain will provide a mechanism to identify that a change has occurred; and (3) efficient and quick access to the electronic package regardless of how long it has been since the package was stored with the Blockchain architecture.
Why is this Important?
Currently, there are Blockchain Ricardian Contract applications providing the automated process functionality discussed in this paper. Organizations would be well advised to investigate and implement Blockchain enabled Ricardian contracts. Theory has met reality. With this paradigm shift, one can only imagine the speed to business and efficiencies that can be achieved.