The Ricardian Contract

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A Ricardian Contract is used to issue digital currency, or value. It is named after the economist, David Ricardo, who developed the theory of comparative advantage. This theory says, in brief, that trade is mutually advantageous even when one party has an absolute advantage.

The contract states the terms under which the value is redeemable, as well as the public key of the issue and the signature of the Issuer. In order to trade accounts denominated in a particular contract, the User must install the contract in his client. The account numbers are denominated in the hash of the contract, which means that the contract cannot be changed once issued. This protects the Users from the Issuer changing the contract after the fact.[1]

A Ricardian Contract can be defined as a single document that is

  • A contract offered by an issuer to holders
  • For a valuable right held by holders, and managed by the issuer
  • Easily readable by people (like a contract on paper)
  • Readable by programs (parsable like a database)
  • Digitally signed
  • Carries the keys and server information
  • Allied with a unique and secure identifier

In the simplest possible terms, a Ricardian Contract is a document defining a type of value for issuance over the Internet. It identifies the Issuer, being the signatory, and any terms and clauses the Issuer sees fit to add in to make the document stand as a contract.

The same document has to be both 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. Further sections within describe, in program-parsable terms, usage of decimal points, titles, and symbols.

As legal signatory, the Issuer signs the document in the OpenPGP cleartext form with his contract signing key. He includes the full chain of OpenPGP keys within the document to permit programs to directly verify and authenticate.

To uniquely identify the contract, any user can calculate a canonical message digest over the clearsigned document. This message digest is included in all records of transactions, and provides a secure (unforgeable) link from the document to the accounting of the issue.

For example, e3b445c2a6d82df81ef46b54d386da23ce8f3775 is the full message digest for Systemics Inc's issue of prepaid services dollars. Commonly called a hash, the message digest is a cryptographic technique to create a relatively small number that is one to one with the document. That is, for each document, there is only one hash, and the hash refers uniquely to that document. The algorithm is the well-known standard, SHA1.

Concern: The treatment of the Ricardian Contract as a contract may raise more legal questions than it answers. For example, is this form indeed a contract? How do distinct jurisidictions view the concept (common law, civil law, UCC, Koranic code)? Is this a negotiated or a form contract? When did the user accept the contract? How strong, or rebuttable, is the presumption that the user has the contract?

See also

  • What is a Ricardian Contract