Crypto Staking without securing the network

Salam Mufti Faraz and Mufti Bilal, I hope your both in the best health.I have read the article about staking to help secure a network(creating nodes) which was very helpful but some people recently have made such networks in which u can stake that network coins for rewards but not to secure the network but rather to make that coin more scarce and possibly other reasons and you get a reward for staking.My question is that is it okay to get rewards for staking without helping the network? Thank you


May Allah bless you.
Staking comes in different forms, some may be shariah compliant whilst others are not.
I believe that the general questions you need to ask yourself is:

  • are you staking halal cryptos?
  • are you being rewarded for lending to a pool or delegator and not for the work of validating transactions?
  • are you trying to secure a network which has haram dealings on it?

If any the answer to any of the above is YES, then you should just stay away from it.

And Allah knows best!

P.S: do share the name of the network you are referring to between us

Salam Aleykum wr Mufti Bilal,
I watched your video where you mentioned staking may not be halal due to some of the underlying transactions being Haram, therefore validating such tx’s and earning a reward for doing so would be deemed impermissible. However, I think a lot depends on when you deem a transaction to be complete. In PoS the transaction is already complete, as attested to by the cryptographic signatures of the parties, by the time it lands in the mempool. The validator is simply the bookkeeper. And not all transactions in the mempool will be haram. Simple token exchanges, NFTs, Oracle updates, etc are not interest based transactions.

A bookkeeper who simply records a haram transaction without being a party to the transaction is not guilty of the act of witnessing or recording the transaction – “in so far as the accountant is not involved in charging interest, claiming it from the debtor, or pursuing him for the matter, merely making entries in a ledger will not make him or her liable to fall within the ambit of prohibition stipulated in the hadith”­­­ – taken from a fatwa penned by the Hanafi faqih Mufti Taqi Usmani.’’

Also, if you are delegating to a staking pool like LIDO, you are depositing into a smart contract that is governed by a DAO. This DAO distributes the pooled funds across many DAO approved validators/node operators. Profits are shared between the depositors, node operators and a fee is taken by the LIDO protocol which is sent to the treasury. If the underlying transaction (PoS) is Sharia compliant then doesn’t this follow the concept of Mudharaba? Operating a node/validation infrastructure requires expertise and there exists the risk of slashing. Delegating directly to a validator/node operator also bears this risk.

By the following logic: ’ are you being rewarded for lending to a pool or delegator and not for the work of validating transactions?’, the Marhaba Defi Liquidity harvester could also be deemed impermissible as the user is not the one executing the sharia compliant liquidity mining strategy. The fund management and strategy execution is being carried out by Marhaba smart contracts and a certain level of off chain management. By this logic, depositing funds into the LH would also be ‘‘lending’’. I dont think the action of depositing funds somewhere should be the criteria for determining if something is impermissible. Is it not the permissibility of the underlying transaction, the profit sharing mechanism and risk associated with the underlying transaction that should be assessed and not the mere action of depositing into a pool? after all the LH will also behave like a pool.

JazakAllah u Khairan brother

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May Allah bless you.

  1. I strongly believe that the system of validation is paramount to the completion of a transaction within the crypto world and hence, validating haram transactions will amount to aiding in sin. The example you have given of the accountant and the fatwa of Mufti Taqi is not valid to use as an analogy in my opinion for two reasons: a) the opinion on the accountant’s role (recording haram transaction) is subject to differences among the scholars and therefore, it must be used cautiously and b) the accountant’s role cannot be compared to the validators. In fact, I would consider the process of validating a transaction on the blockchain more similar to the process of clearing when trading shares.

  2. With regard to Marhaba Defi, first of all, the liquidity harvester is not currently running and no one knows what it will actually look like. Secondly, any queries related to Marhaba’s products should be addressed to them directly.

And Allah knows best!

May Allah Bless you too brother, Thank you for your response. I thought you were on the Marhaba DeFi Sharia Board and have authority over the inclusion of products and features?

I believe it depends on wether or not you believe a transaction is only completed once it is included into the ledger. The role of validators is to achieve consensus on wether or not these transactions have occurred, hence the word ‘validate’ rather than ‘process’. Clearing houses bear the counter party and liquidity risk. Meaning that the clearing house needs to settle the transaction in the event of default. The fact that these risks are present constitute to the transaction not being complete until these risks are mitigated by the clearing house and the transaction is settled. From my understanding these risks are not present in blockchain based transactions that have entered the mempool and all that is left is merely bookkeeping and attesting to the truth. A clearing house acts more like a third party/intermediary that bears the risk a buyer or seller can incur rather than just a validator to such a transaction. They also receive a fee inherently from the transaction they are clearing/processing. In PoS the rewards do not come from any fees that are inherent to the transaction. The rewards are mainly from the block reward and potentially the Gas fee (subject to EIP 1559). The Gas Fee is inherently independent from the underlying transaction in the sense that it is not interwoven within the parameters of the transaction. For example a lending and borrowing smart contract would have its on transaction fee/profit generating mechanism inherently build into the smart contract, this is different from the Gas fee required to interact with the smart contract and broadcast a potential change in the state of the blockchains ledger. The transaction fee generated by the smart contract stays within the ecosystem of the protocol and is not in any way distributed within the PoS reward mechanism.

Just to add, ‘Lending’ to a pool implies a loan and some fixed riba element does it not? How is that the same as providing your funds to a party via a profit sharing % mechanism that is not fixed and dependent on some underlying economic activity. If i agree to give you 1000 USD to share in the profits of your apple trading business and you agree to give me back the principal as long as no systemic issue arises in the underlying business + a share of the profits, is that considered a loan in your opinion? Given that PoS is permissible, the principle amount users allocate to a delegation pool bears the risk of slashing and the rewards are based on what is earned through distributed validation across many validators. How can you classify this as ‘‘lending’’?

Please do clarify and give your thoughts, I believe this type of exchange is beneficial for all parties.

Allah Knows Best.

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  1. I totally agree with you but, when I am comparing clearing house with validating a transaction on the blockchain, I don’t mean by point to point features, but rather the role that they play in the completion of a transaction in their respective ecosystem. For shares, scholars agree that one cannot trade them until they take full ownership and possession of the shares which happens after it has been fully settled, which is roughly two days after it was traded. Similarly, I believe that the full ownership and possession is only transferred once it has been validated and not before. Hence, completion of the transaction is not fully completed until it has been registered on the block.

  2. First of all, POS process is permissible based on the fact that it is like an agreement of ju’ala (one of the parties offers specified compensation to anyone against achieving a predetermined work, task or result) and not a bai’ (sale). Therefore, a delegator providing crypto to a pool in a delegated staking process is similar to a lender rather than an investor giving money to do business.

Previously, I have discussed with others the points that you have mentioned already, and I am sorry to say that I do not see a single reason to think of delegated staking pool as permissible in general. However, crypto world changes rapidly and there might be scope to think otherwise in the future.

I hope the above made sense, but you are free to disagree. I will reconfirm my position in the next video inshAllah.

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Shukran Jazeelan Brother, May Allah Reward you for your work. I appreciate the feedback.

  1. I cannot say I agree or disagree, as im not a Sharia expert and im just trying to create dialogue that will lead to a better understanding. What i can say however is that delegation is different from lending. The tokens never leave your wallet. As can be seen by checking your wallet address. They are not given to the validator. It’s merely a way of saying i stand behind this validator with my pledge. The validator does not have custody of the funds. He or she can only reference your wallet/balance and the wallets/balances that all users have pledged in faith that this validator will validate truthfully. If a slashing event occurs, funds are deducted from your wallet balance, not the validators. Thats why it is more desirable and easier to trust a validator that is also staking their own coins. In the case of ETH 2.0, any staked ETH is locked until the launch of ETH 2.0. Protocols like Lido give you an arbitrary token called stETH (which represents your locked ETH and earned ETH via staking) as a means of having a liquid representation of what you have locked in for staking. None of the ETH in LIDO smart contracts is sent anywhere other than the ETH 2.0 staking contract. The approved validators can merely reference the Lido smart contract that shows that the entity who is actually in custody of the funds has delegated to this approved validator, in this case the holder of stETH by proxy of the LIDO smart contract. If Im not mistaken.

  2. Just to add, I would say the validator is not validating single transactions, rather their role is to validate blocks. They do not have the power to accept or reject transactions. Rather the only power they have is to rearrange the order of transactions in a block and attest that the blocks are created in a honest manner. The validator is not profiting from any fees inextricably linked to impermissible transactions and is simply acknowledging that the collective set of transactions for that block are correct.

In your opinion, is it permissible to use stETH as a medium of exchange? ie, to buy and sell it? stETH represents ETH locked in ETH 2.0 staking contract via Lido. If i dont delegate my ETH and generate stETH or use stETH to access staking rewards. Is it still permissible to allocate to a liquidity pool containing stETH or to trade between ETH and stETH?

Im assuming that the concept of a third party conducting Liquidity Mining on your behalf would also be Ju’ala by your definition? and therefore a form of lending?

Once again i appreciate your comments and sorry for all the questions. I am merely trying to learn, see what i can and cant do and create constructive dialogue that hopefully leads to consensus on the different matters.

JazakAllah Khairan

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BarakaAllah fik

  1. A scholar told me the same thing as you did but he also came to the conclusion that the current model is non shariah compliant due to the gharar involved as the pledge is similar to an insurance, the premium is the profit made from the staking process. I still believe its not permissible based on a lending structure, however, one may say that both are involved and the conclusion would be the same in terms of delegated staking pool’s impermissibility.

  2. Yes I agree, but I still see it as part of a transaction validating process and therefore, validating blocks which results from a haram transactions, it will still be a sin

Liquidity mining is a separate discussion all together for some other time maybe.

As for the token you mentioned, we don’t comment on particular ones on this forum.

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Salam Mufti Bilal, appreciate your insights.

I feel that we can go round in circles if there doesnt exist a set of criteria that is relevant to this technology. Drawing similarities with legacy based financial instruments may act as a point of reference but doesn’t serve as a constructive approach. Insurance requires that premiums are paid up front for the insurance period and are predetermined based on the level of risk. Insurance providers may utilise the total amount of premiums in financial instruments such that any and all claims would not exceed the total amount of premiums utilised. Premiums are predetermined based on many factors including the time value of money. Insurance providers also raise the premium on a party that has previously claimed or is likely to claim again. This is in no way similar to the delegation, slashing and reward structure used in PoS delegation pools. Drawing such similarities on two completely different transaction structures is the wrong approach in my opinion. Regardless, I will lean on the insights of the scholars and Mufti’s such as yourself.

The token i mentioned is relevant to this discussion. Let me explain why, from my understanding the way FIAT currency or the stable coin DAI are generated and backed are by no means compliant with Sharia. However, there is consensus amongst scholars that FIAT currencies are permissible as mediums of exchange out of necessity and a few other factors. The way DAI is generated and used to release underlying collateral in Maker DAO vaults uses an element of Riba. However, if a user is just using DAI as a medium of exchange and not involved in generating it, shouldn’t that have the same level of permissibility as FIAT currency or FIAT backed stable coins such as USDC? Apparently not according to Dr Farrukh (Provided, DAI is over collateralised and has less riba instruments backing it, unlike the US dollar which is backed by more debt/riba instruments that collateral). If we are using necessity and government endorsement as a factor effecting permissibility, we could find ourselves in a scenario where we are accepting something even worse.

This is why I asked the question: ‘‘In your opinion, is it permissible to use stETH as a medium of exchange? ie, to buy and sell it? stETH represents ETH locked in ETH 2.0 staking contract via Lido. If i dont delegate my ETH and generate stETH or use stETH to access staking rewards. Is it still permissible to allocate to a liquidity pool containing stETH or to trade between ETH and stETH?’’ .

Thank you for taking the time to reply to my messages

JazakAllah Khairan

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Fair point, there is no set of guidelines because its new and most scholars see crypto as impermissible in general, but my point remains that delegated stake is impermissible in general and staking on platform where there are haram transactions is also impermissible. Although let me remind you that I am not using outside structure to draw an analogy to make a ruling as I am oppose to this process myself. But I am using them as example to give lay people a better understanding of what is happening. You may disapprove this approach of course.

As for the other token I will not comment as I never comment on any tokens here.
As for what other scholars say such as Dr Farrukh, I cannot comment on that either sorry.

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Thank you and may Allah bless you for taking the time to respond and share your views. Is it fair to assume that there is currently a difference in opinion amongst the ‘‘pro-crypto’’ scholars with regards to PoS on chains with haram transactions and delegated stake?

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A scholar who allows POS with haram transactions, I do not know anyone who says that. Do you?

For delegated staking either I do not know anyone who says its permissible in general. The scholar I mentioned above says its impermissible but for different reasons than mine.

So it would be difficult to say there is a clear difference of opinions among the pro crypto scholars. If you have heard of anything then please do share it on here.

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Salam Brother, I meant that there may be a difference in opinion based on what it means to validate, the permissibility of attesting to haram transactions and the impact that has on transaction finality. Ultimately if it is not haram to attest to a haram transaction happening providing that you are not profiting inextricably from the transaction and this act of attesting doesn’t impact transaction finality then i would assume that there would exist a difference of opinion. Im not trying to say that there exists a difference, only highlighting that these would be the factors influencing any difference in opinion. I agree with your stance on this matter and Im yet to find anything that would assume transaction finality is not dependent on the attestation of the transactions .

However, Im still yet to be convinced on the delegation being a form of lending and the scholars comparison to it being similar to insurance.

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Salam Aleykum Mufti Faraz, What are your opinions on PoS with regards to this conversation?