Investing Question: Is participating in a proof of stake network halal?

Salaam,

Are rewards from participating in proof of stake the same as riba? This goes for proof of stake where I can delegate tokens for someone to stake on my behalf and for running my own node in a PoS network.

Jzk

Assalaamu alaykum,

In a PoS model, you only get selected to be a node in the network if you have a specific amount of coins stored previously in your wallet. After being a node, if you want to be qualified for being a miner you will need to deposit a certain amount of coin, after that there will be a voting system for choosing the validators. When it’s all done, the miners will stake the minimum amount required for the special wallet staking. New blocks will get created proportional to the number of coins based on the wallet. For example, if you own 10% of all the coins, then you get to mine 10% new blocks.

There is no issue in this from a Fiqh perspective as one’s coins are not gambled. One’s holdings are used to determine who gets to mine the new blocks. The rewards do not come from others staking their coins either, but from the transaction fee.

Allah knows best

2 Likes

Jzk

How about in the case of Tezos where I can stake any amount by simply delegating my tokens to an approved baker/staker who can then stake on my behalf? In this case, I can stake any number of tokens with there being no minimum amount, and can also stop staking at any moment and start again if needed. The actual staker would have fulfilled the requirements of the network in regard to number of coins staked and hardware requirements.

Jzk

In the case of baking, the delegated baker signs & appends a block of transactions to the Tezos Blockchain. The subsequent fees they receive are also lawful as they were delegated to carry out the baking for which they earn a fee for.

Allah knows best

2 Likes

Salam Alaikum mufti,

Could you expand further on the legalities and inner workings of POS stake please?

jazak Allah khairan

Assalaamu alaykum,

In a PoS model, you only get selected to be a node in the network if you have a specific amount of coins stored previously in your wallet. After being a node, if you want to be qualified for being a miner you will need to deposit a certain amount of coin, after that there will be a voting system for choosing the validators. When it’s all done, the miners will stake the minimum amount required for the special wallet staking. New blocks will get created proportional to the number of coins based in the wallet. For example, if you own 10% of all the coins, then you get to mine 10% new blocks.

Of course, the above varies as not every blockchain has mining. But the PoS functions in that manner.

There is no issue in this from a Fiqh perspective as one’s coins are not gambled. One’s holdings are used to determine who gets to mine the new blocks. The rewards do not come from others staking their coins either, but from the transaction fee.

Allah knows best

1 Like

Assalamu Alaikum,

In the majority of Proof of Stake blockchains, as they are in its infancy the rewards come from a combination of transaction fees aswell as a minting process. In the long term the rewards will be purely from tx fees, but in the early stage the majority of profits originate from new coins/tokens being printed - unless they have a 100% premine.

Does this change the permissibility at all?

Wa alaykum salaam,

Kindly share a specific case study.

This is the case in I believe the majority of all cryptocurrencies, as they are in the early stages. Many of them are described as deflationary assets, however in practice they are actually inflationary assets until they pass supply equilibrium.
Even bitcoin, while it is commonly stated to have no more than 21 million coins ever…the current 18.4 million circulating coins keep increasing at an exponentially decreasing rate until 2140, when the final bitcoin will be mined and the miners will only be rewarded from transaction fees.

However with regards to specific case studies, I would say Stellar Lumens is one of the more well known ones. It has a currently circulating supply of 20.3 billion XLM, and a maximum supply capped at 50 billion XLM. Prior to the hard limit announced in protocol v12 it had an annual inflation of 1%. In either case, coins are being created and then awarded to stakers. To continue on this, if/when ethereum 2.0 releases as casper upgrade, it will be an unlimited inflationary Proof of Stake asset. Perhaps this discussion overlaps with money creation and printing?

So there is two avenues to explore here:

  1. the hardcoded maximum supply in the blockchain code which dictates the total coins, that are released at a slow rate and rewarded to earlier stakers.

  2. the case where a network is unbounded in maximum supply and it will forever print new coins to be released at a predetermined inflation rate, which are them proportionally distributed to stakers.

Jazakallahukhair

Wa alaykum salaam,

Can you share a specific Crypto-asset where the PoS model gives rewards from the minting process. I just want to review a specific case to see the documentation and process.

I would recommend you look into tezos (uncapped supply PoS) and stellar (now capped supply PoS)

Jazakallahukhair

Tezos is fine. Stellar does not use Proof of Stake, however it is Shariah compliant.

Jazakallahukhair for the clarification

Asalam O Alaikum,
I want to know if delegated proof of stake (dpos) systems are halal. Specifically asking about ICON ICX it is a blockchain that uses a slightly different algorithm called Loop fault tollerence

https://www.google.com/amp/s/academy.binance.com/blockchain/byzantine-fault-tolerance-explained%3Famp=1

In a nutshell this has a staking mechanism and a voting mechanism to delegate a node which does the mining process. I also want to make sure that i really think this protocol as a very solid investment so is it possible that i dont get involved in staking and can only keep the coin as an investment purpose because the technology is superior and I consider it a very strong innovation in crypto space.

Thanks I’ll be waiting for you reply.
My question is specific about ICON ICX

Salaam,

I think most of the crypto assets (Eg ETH, XTZ, ICX) are not currencies/cash/money from a shariah definition of currency/cash/money. Their currency attributes (if any) is within a specific ecosystem and usually not their main goal (except perhaps Bitcoin).

Does riba then apply when assets are staked? I thought riba applies only to money or currencies.

Well, that’s a debatable issue. Because a currency can be ascertained between 10 people. It doesn’t have to have mass acceptance. Something can function as currency within an ecosystem.

Nevertheless, Crypto-assets can serve multiple functions beyond being a medium of exchange.

In regard to the question, it all depends on the particular structure and flows. A generic answer cannot be given.

Allah knows best

1 Like

Ok now I’ll get more precise this ICX is primarily an interoperable chain that has uses like to connect other blockchains. I am not staking anything and keeping all my coins out of the staking ecosystem but i consider is as a technological giant that will help get things very digital such as Identification and it has a lot of use case for the Korean government and simply digitalization. I want to keep this as an investment but want to know if i should or not in the light of Shariah

Adding a bit of more information regarding its staking mechanism they lock in your coins for a period if you stake them and a penalty is given to the user if the delegated node acts maliciously.

1 Like

As-salaam Mufti,

Just to clarify your answer with regards to Stellar or any token that mints its coins through the processing of depositing or staking tokens within a network. Can I assume then Hex token is also permissible? As Hex token holders get rewarded, through minting new hex token, when staking or depositing and locking their hex tokens for a period of time. Jazakuallah