We continue to explore the world of the blockchain, and one of the conspicuous notions in this field is called “a smart contract”. In this article, we’re going to find out what the difference between a smart and a Ricardian contract is. However, before diving into the details, let’s answer two simple yet legitimate questions: “Why one needs a smart contract in the first place?” and “Is there anything wrong with traditional contracts?”
A brief answer to the second question would be that no, there’s nothing wrong. Nevertheless, there’s one flaw in traditional contracts. They are written in a human language, so they are prone to interpretations. The ambiguity of our language allows lawyers to build in escape routes within the clauses of the contract. In an ideal world, a contract must ensure that each party involved gives and receives exactly what they bargained for. But that’s not always the case. Sometimes parties, in forming a contract, may understand some points differently, and that can lead to a disaster. In this case, contract parties rely on the public judicial system to deal with the situation, which can be very costly and time -consuming. For instance, a single comma in a contract cost Bell Aliant, a telephone company in Atlantic Canada, 1 million Canadian dollars. So this is where smart contracts come real handy. They don’t leave any chance for possible linguistic interpretations.
Even though the blockchain technology is considered by many as the symbol of the future, the term ‘smart contract” has been known for decades. A cryptographer and computer scientist Nick Szabo came up with the idea in the mid-90s. In his own words, a smart contract “is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions”. The main idea behind smart contracts is to determine the relations and obligations between parties via computer code and automatically administer them. If you’d like a less technical definition, smart contracts make possible to exchange money, property, shares, or basically anything of value in a transparent and non-conflicting way. In other words, smart contracts provide trust, which is a crucial factor for a decentralized blockchain network where parties remain anonymous.
At the blockchain event in Washington, DC in 2016, Vitalik Buterin, then a 23-year-old programmer from the Ethereum project, explained that thanks to the use of a smart contract, an asset or currency is transferred into a program that monitors its compliance with the set of conditions. At some point, this program confirms fulfillment of the terms of the contract and “it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof.” In the meantime, the decentralized ledger also stores and replicates the document, which gives it certain security and immutability.