One of our most important missions for broader business adoption is to develop a full solution that includes technical, legal and financial infrastructure and enables users to create and sign legally binding documentation within the blockchain. In order to achieve this, there must be transparency as well as the ability to track down the contract at any stage from the signing of an agreement to the transaction stage. For that, we’re going to implement a full solution based on Gravity blockchain using something called Extended Gravity Solutions Contracts.

While large organizations have teams of legal professionals, small and medium-sized Enterprises lack such resources, so they require a framework that addresses all of the standard business processes that are part of standard operations as well as the ability to conduct agreements with other counterparties.

The Problem Of Legal Significance

The term smart contract was first defined in the late 20th century by Nick Szabo in eponymous paper. The thought on smart contracts has advanced significantly since then, and currently it is a dynamic entry in a distributed ledger, that can cause more entries to be created when specified conditions are met. Usually, this means that a smart contract is something that records and automatically executes predefined agreements in a secure and impartial fashion. This kind of usage of the distributed ledger technology was even discussed around the time of the release of Bitcoin’s Whitepaper, but was popularised by Vitalik Buterin and Ethereum project. Currently, it is believed to be the dominating feature of blockchain technology.

Let’s assume we have a digital document (a file), and our challenge is to protect it from modifications as well as clearly record the fact of its existence and ownership by someone at some point in time. Traditionally, one would bring the papers to a notary who would legally verify it. In blockchain, this is done by a smart contract, which easily accomplishes all these things. It may seem that now there is no need for the notary. However, there is still a problem: the smart contract is just an executable code, and as of yet there are no legal standards for a contract fulfillment with and by code that is acceptable by legal authorities.

Ricardian Contracts

Ricardian contracts were introduced in late 20th century by Ian Grigg (@iang) to make a contract valid for both machines and humans .

The Ricardian contract is a single document or legal agreement that contains machine-readable markup language and has the following attributes: It must be parseable (easy readable by both programs and people), digitally signed, carrying information about keys belonging to the parties, and have a unique and secure identifier.

Ricardian contracts also have a key of a higher-level document, which enables an ability to check the chain of the contract’s signatures in one automated sequence. This check ensures full transparency of document circulation, excludes spoofing attacks and provides quick search functionality. Here is an excellent article that explains what Ricardian contracts are and the difference between them and smart contracts.

It’s worth touching on the parsability feature of Ricardian smart contracts in more detail. According to Ian Grigg’s concept, the contract describes natural and legal relations between persons and legal entities. Therefore it should firstly be comprehensible to people, and then to the machines according to markup language principles. Typed settings in the contract template enable the automatic monitoring of contract facts and prevent their misinterpretation. You can see more detailed information about Ricardian markup language here & here.

The concept of the Ricardian Contract is being developed by projects such as Mattereum with the aim to match smart-contracts and legal standards of certain jurisdictions.
Mattereum’s ultimate goal is to create an Internet-of-Agreements, a worldwide ecosystem of legally-valid smart contracts.

Acknowledging the importance of the bridge between legal framework and smart contracts, Gravity Solutions cooperates with the projects like Matereum and develops the Legal Framework that will make the smart contracts use, legally compliant.

Digital signature

In order to make an agreement legally valid, a Ricardian contract has to be signed with parties’ Digital signatures. In any blockchain protocol, the combination of private / public key is already a form of digital signature that allows for the identification of an owner of an account. However, in order to make it valid for the legal space, the KYC procedure should be executed to identify the human or organization behind the public key.

Gravity Solution’s identification is built on 3rd party KYC providers that verify the accounts and blockchain AUTH component which makes sure that the private keys have identified persons or entities behind them.

AUTH Component provides user authentication through public protocols such as OAuth, OpenID, and is the gateway to KYC plugin services, which implement a required depth of authentication for physical and legal persons, from decentralized solutions to state-approved providers of digital signatures as well as any other better solutions which may come along in the future.

Users will be able to create accounts with various levels of identification, from fully anonymous (incl. Stealth transactions) to fully confirmed because some tasks are impossible to solve without such confirmations. Some business apps that we are going to implement on our blockchain will require identification. For example, a documentation circulation system that requires legally valid documents.

Extended Gravity Solutions Contracts

As a complex solution to the problem of implementing the electronic document circulation to Gravity Protocol, blockchain offers the system of Extended GS Contracts. An Extended Contract is a combination of the Ricardian Smart Contracts concept as well as a decentralized infrastructure that handles their execution. Gravity Solutions develops a freely extensible Extended Contract template library for users, covering all standard business processes, e.g. purchases, rental, leasing, refit and employment contracts, fiduciary management, loans, delayed delivery, agency agreements, cessions, investments and so on. Every economy agent can use this library to choose the purpose and specifications of the contract, which will become a full agreement after some modifications.

Let us consider the type-case of contract creation with the Extended Contract system.

In order to formalize the Extended Contract, participants choose a template from the legal templates library and change it to suit to their business situation. After successful approval of the resulting contract, the contract is uploaded to storage, creating the relevant transaction with the hash of this contract in the blockchain. Then it is signed with the electronic signatures of all participating entities. One of the confirmations of compliance with the contract’s obligations is the fact that all off the contractors signed the transaction with the hash of the related documents (acts, consignment notes and so on), contained in the storage.

Documents are stored off-chained in external storage with the help of the Data Storage Component of Gravity Business Framework, which addresses the problem of limited block size and blockchain bloat. We’ve already written about IPFS implementation on protocol level in Gravity blockchain in this article "Gravity IPFS: Off-chain Data Storage". The key feature here is that not only decentralized databases like IPFS can serve as the external storage, but classic RDBMS i.e. PostgreSQL, Oracle, SQL Server and others as well.

One of the issues of extensive business integration of blockchain technologies is the lack of user-friendly interfaces and use cases which do not require a staff of highly trained specialists. Another requirement is that the documents generated by the blockchain solution comply with international legislative standards. The use of an Extended Contract system allows the creation of a dynamic electronic document circulation environment, and with the help of Ricardian contracts is both easy to use and has legal significance.

by Yuri Parsamov