Caiz Insights: Staking Cryptocurrencies and Fiqh-Compliance

TL;DR

Aside from the staking method used, the cryptocurrency being staked must meet specific criteria to be deemed halal. First and foremost, the cryptocurrency must have a tangible value and be a legitimate project. Secondly, the purpose of staking should aim to further the development and support of the ecosystem or platform. Thirdly, those who choose to stake must have a comprehensive understanding of the process. Fourthly, there should be no element of gambling involved in staking. Finally, the crypto being staked must not have any association with un-Islamic or unlawful activities.

Takeaways

• By staking your existing cryptocurrency holdings, you can earn rewards for verifying transactions on a blockchain network.
• Staking may be Halal, but careful examination of each project is vital for Fiqh-compliance
• Staking is a popular way for crypto users to generate passive income.
• Staking can offer higher returns compared to traditional savings accounts.
• The volatile nature of cryptocurrencies means that staking also carries risks.
• Staking programs have come under increased regulatory scrutiny in recent years.

Much like other aspects of cryptocurrency, Staking can be either a straightforward or intricate concept depending on the depth of understanding sought. For many cryptocurrency users, the key point to remember from this article is that staking allows them to earn rewards by holding specific cryptocurrencies. However, even if one is only interested in receiving staking rewards, having a basic understanding of how and why things work can still be beneficial.

What is the Process of Staking?

If your cryptocurrency allows staking, you have the option to “stake” a portion of your holdings and receive a gradual return on it. When you stake your cryptocurrency, it is incentivized by the blockchain’s use of it. Cryptocurrencies that support staking use a “consensus technique” called Proof of Stake (PoS) to ensure that all transactions are secure and verified without the need for a bank or payment processor. By choosing to stake your cryptocurrency, you can participate in this process.

Is Staking Crypto Halal or Haram?

Liquidity mining and yield farming for lending are generally Haram, but those for brokerage and exchange may be not. Each new project should be examined for Fiqh-compliance. In short, staking may be allowed, but careful examination of each project is necessary for Fiqh-compliance.

Why is Staking only Allowed in Some Cryptocurrencies?

At this point, we move into a more technical level of understanding. It’s worth noting that staking is not available for all cryptocurrencies, including Bitcoin. To get a full picture, some background knowledge is necessary.

In most cases, cryptocurrencies function in a decentralized manner, without relying on a centralized authority. So, how do the computers within a decentralized network reach a consensus without being provided with information from a central authority like a bank or credit card company? They use a “consensus mechanism.”

The consensus mechanism employed by a given cryptocurrency is a critical aspect of its functioning. Proof of Work (PoW) is one such mechanism, used by Bitcoin and several other cryptocurrencies. In PoW, the network’s participants compete to solve a complex mathematical puzzle, with the first one to solve it being rewarded with newly minted coins. This requires significant computational resources, making it difficult for an individual to gain a majority of the network’s computing power and compromise the system.

In contrast, PoS is the consensus mechanism used by several cryptocurrencies that support Staking. In PoS, validators are chosen based on the amount of cryptocurrency they have staked on the network. These validators are then responsible for verifying transactions and adding them to the blockchain, with rewards given to them for their efforts. Validators who act against the network’s interests can have their staked cryptocurrency seized as a penalty.

• A network participant is chosen to add the most recent batch of transactions to the blockchain and receive some cryptocurrency in return through Staking, which performs a similar role to mine. The validity of the blocks is also determined by stakeholders, i.e., stakers.
• Users vote their coins to guarantee the security of the blockchain, with the specific implementations varying from project to project. Their staked coins serve as an assurance that they are acting honestly and as a deterrent against breaking blockchain protocol regulations.

Understanding the consensus mechanism used by a particular cryptocurrency is vital when it comes to staking. While some cryptocurrencies require a significant investment of computational resources to participate in their consensus mechanism, staking enables individuals with smaller amounts of cryptocurrency to participate and earn rewards.

Is Staking Crypto the Same as Gambling?

Staking crypto is often viewed by some as a form of gambling, which is Haram in Islam. This is because staking involves betting that the cryptocurrency will increase in value, so that the investor can sell it at a higher price and make a profit. However, when compared to investing in stocks and hoping for their value to increase, the principles are essentially the same.

While it can be argued that a stock represents ownership in a company, whereas a coin does not, this argument can be challenged. For example, the share that an individual buys may not entitle them to voting rights, so it raises the question of whether they are truly an owner with full owner rights. But to stay on topic, staking is simply another form of investment that allows investors to generate a profit in return for supporting the network.

It’s important to understand that staking is vastly different from purchasing a lottery ticket. Staking involves a level of skill, knowledge, and strategy, whereas buying a lottery ticket is purely based on chance. Therefore, while staking may have some similarities to gambling, it is ultimately a legitimate form of investment that allows investors to participate in the growth and development of the crypto ecosystem.

What Benefits does Staking Offer?

Staking is an additional tool to support the security and effectiveness of blockchain initiatives that you believe in. You can increase the blockchain’s security and transaction processing capacity by staking some of your funds.

Staking offers benefits to cryptocurrency holders in several ways. Firstly, it enables long-term holders to put their holdings to work and earn rewards instead of keeping them idle in their wallets. Also, staking can support the security and efficiency of blockchain projects by allowing users to contribute their funds to the network’s operations. By staking a portion of their cryptocurrency, users can help secure the blockchain and increase its transaction processing capacity, while earning rewards for their contributions.

• Passive Income: one of the key benefits is the opportunity to earn passive income by holding and staking your tokens. This can be especially attractive for those who don’t plan to sell their tokens in the short term and want to make their holdings work for them.
• Easy to use: staking can be relatively easy to get started in, especially if you use a cryptocurrency wallet or exchange that supports staking. This can help simplify the process for those who may not have advanced technical knowledge or equipment required for more complex staking methods.
• Support your favorite blockchain projects and cryptocurrencies: By staking your funds, you are contributing to the security and efficiency of the network, making it more resilient to attacks and enhancing its ability to process transactions. This can help strengthen the overall ecosystem and promote the growth and adoption of the projects that you are invested in.

Are there Risks Associated with Crypto Staking?

Staking your cryptocurrency tokens involves committing them for a specific period, which could range from several weeks to months depending on the program. During this time, you may not be able to cash out or trade your tokens, leaving you vulnerable to price swings and market crashes.

When is Staking your Crypto permissible and when not?

Case #1: It is considered Haram if an entity takes your cryptocurrency and pays interest, akin to a cash-on-cash loan. This is where you provide capital, and they guarantee to return it with a premium, regardless of your contribution, and irrespective of whether they make more or less than the quoted rate.

Case #2: It is considered Haram if an entity pays you from the cryptocurrency purchased by new coin holders after taking your coin. This is a Ponzi scheme, and it amounts to misappropriation of other people’s wealth (Arabic: أكل أموال الناس بالباطل), which is not allowed in Islam.

Case #3: It is considered Halal if an entity takes your cryptocurrency and utilizes it to verify transactions, contribute to security, and provide computing functions on the virtual machine/network. This is considered permissible as you are partnering with them, and your participation and rewards are contingent on selection and contribution criteria.

Things to Consider before Starting to Stake

Staking can be a straightforward process for most people, though it may require some technical knowledge and a minimum amount of tokens. In order to participate at a more advanced level, such as becoming a validator, you may need a dedicated computer and additional expertise, as well as a significant commitment to maintaining uptime and security.

Fortunately, there is an easier way for many people to begin staking. By using a cryptocurrency exchange, users can contribute to staking pools without needing to purchase or maintain expensive hardware. This can be a more accessible option for those who are new to staking or who do not have the technical skills or resources required for more advanced participation.

Fiqh-compliant aspects to consider before staking:

• Passive Income: The primary incentive for staking is the passive income it generates, but the reward is dependent on factors such as the network’s protocol and the percentage offered by different platforms. It’s important to research to maximize returns and also evaluate the network and coin before investing.
• Liquidity: Investing in a liquid coin is essential, especially when dealing with lesser-known altcoins. Lower liquidity leads to higher volatility and may negate any staking rewards. You want to ensure that the coin you invest in is easily convertible to cash when you need it.
• Ease of Use: Some amount of technical expertise is required to engage in staking for obscure coins, but well-known coins can be staked on popular exchanges such as Coinbase and Binance. However, this convenience comes at significant fees.
• Fees: Fees can eat into your returns and come in various forms such as spread fees, purchase fees, and staking fees charged by exchanges or wallets.
• Tax: Different governments and jurisdictions have been adapting tax law for cryptocurrency investments. In the UK, staking is treated as miscellaneous income and is taxable. It’s essential to keep any tax implications in mind before staking.

Does Staking Involve Riba?

The Islamic faith strictly prohibits any form of Riba or interest. Due to this, many Muslims are questioning whether staking cryptocurrencies is permissible or not. Staking often involves receiving rewards in the form of additional cryptocurrency tokens, but is this considered as interest or something else entirely?

The answer to this question is not straightforward, as it depends on the specific details of each individual case. Some scholars argue that staking is halal, as there is no riba involved. Conversely, others argue that staking does involve riba, as the act of lending money and receiving a return on that investment is seen as usury under Islamic law.

In the end, it’s ultimately up to each individual Muslim to decide whether they believe staking is halal or not. If there is any uncertainty or doubt about whether a particular stake is permissible under Islamic law, it’s always best to seek guidance from a qualified scholar or mufti.

Concluding Remarks:

The topic of crypto staking in Islam is a subject of debate among Fiqh Jurists, much like the controversy surrounding cryptocurrency itself. While some scholars deem it permissible and halal, others hold a differing opinion, depending on the Math’hab and so on. However, the majority of Muslim scholars agree that staking in the crypto world is allowed, provided that certain criteria are met.

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