Many people are looking for clarity in these topics but there are no clear answers on legality. If @Mufti_Billal@Mufti_Faraz_Adam could make it clear it would help a lot, also our business idea is pending on this.
Is the concept of Liquidity Pools that make decentralized exchanges possible, legal?
Most if not every DEX is built using the Uniswap model so that should be the core that is looked into.
So far I have read from Mufti Faraz Adam’s paper that DEX ICO is allowed. If that is the case, then I assume the concept of liquidity pools is also valid because the whole system is based on those. Please clarify. Also IFG lists Uniswap as “halal”, could we get a clear confirmation on this from the scholars?
Basically how a liquidity pool works is that there is a contract living in the blockchain:
Liquidity providers add coins into the contract eg. BTC-ETH
Users convert ETH -> BTC and pay a fixed fee
Liquidity providers are compensated by giving them a share of the fees
Providers can take out their liquidity at any given time
Losses are based on impermanent loss
Rewards are based on the share % you have of the total liquidity
The company running the contract takes a fixed % but can never access the liquidity directly
Salaam. This is a very important issue and it would be of so much help if muftis can clarify this as an urgent matter. Uniswap is marked halal on Islamic guru finance so kindly clarify this matter at the soonest.
Guys, Liquidity pools, in my opinion is Haram, because its just like giving your money to a bank and then the bank lend this money and take interest on it, then provide you with a profit sharing of the interest he charge on your liquidity. and this exactly with liquidity pools staking is, they use this money for margin trading, futures trading in binance or new defi products and as you know all margin based trading currently in crypto market charges hourly interest rate.
The conventional riba-based banks work slightly differently from DEX. They use the money you deposit as loans (this is same as what DeFi projects do like AAVE I guess) to other customers of the bank. They also provide you a fixed return, there is no risk involved.
“The banking business model is a matter of using customer deposits to offer loans, and from those loans, your bank earns interest that is transformed into interest paid to you.”
Where as with DEX and liquidity pools there is no promised fixed return, you can actually lose money and your deposits are not used to offer loans or margin as you mentioned.
These are fundamentally different cases. The real question is, is the deposited money added into a liquidity pool considered a loan or an investment in Shari’ah?
Some Islamic banks use similar approach to offer “saving accounts” that outwardly resemble conventional riba-based interest banks, but under the hood operate differently. Take a look at Meezaan bank:
They consider this similar case to be a “mudarabah contract” between an investor and manager of the funds, exactly like it is with liquidity pools in DEX. The “interest” is based on the profit the bank makes, not loans.
It would still be quite nice to have a clear answer from any scholar though, otherwise we are forced to make educated guesses based on Islamic banking principles.
Agree with you. Can’t use the bank loan analogy. Acting as a market maker for example would be akin to operating a currency exchange, where you are willing to exchange currencies at any given time for a spread. Now using that money for lending is a different story, but as far as I know, you do get to choose what your funds are used for.
@Mufti_Faraz_Adam@Mufti_Billal can ALL the mufti’s PLS start answering peoples questions such as these as these are very important for the muslims at large. Insha Allah will reward all who take it upon them selves to help the Muslims and people in general. these matters must be explained and answered. and Allah Knows Best
May Allah bless you.
First of all, we cannot answer specific questions on crypto as we do not offer a screening service.
Secondly, liquidity pools may or may not be shariah compliant depending on the structures, and this can only be determined if its screened correctly. Some are compliant and some are not for sure.
Alternatively there are certified shariah compliant pools such as offered by MRHB DeFi: