Published in · 5 min read · Nov 15, 2022
--
Crypto staking is conceivably the most popular way to generate passive income from just owning cryptocurrencies, as many long-term cryptocurrency owners see it as a way to leverage their holdings to generate rewards rather than having them remain dormant in their wallets. Muslims who could be interested in taking advantage of this passive income-generating plan might have some reservations since they are unsure of how it complies with Islamic law. In this article, we provide a thorough description of cryptocurrency staking and how it adheres to Islamic values.
WHAT IS CRYPTO STAKING?
Staking cryptocurrencies entails using crypto assets to authenticate transactions and maintain a blockchain network. It works with cryptocurrencies that handle transactions using the proof-of-stake methodology.
Proof-of-stake is a more energy-efficient choice than the previous proof-of-work paradigm because mining devices, which use processing power to solve mathematical problems in proof-of-work systems, are substituted with coins staked by network users. As a result, this procedure is comparable to mining in a proof-of-work system.
Blockchains based on proof-of-stake may include only genuine data and transactions thanks to staking. To be eligible to validate new transactions, participants agree to stake a specific amount of their crypto as an insurance policy. If they improperly authenticate incorrect or misleading data, they run the danger of losing all or part of their ownership. If they can verify authentic, valid transactions and data, they are compensated with extra tokens.
WHAT IS THE SIGNIFICANCE OF CRYPTO STAKING?
Thanks to staking, cryptocurrency owners now have a way to use their digital assets to earn money passively without having to sell them.
An investment in a high-yield savings account is comparable to staking. Like in the real world, the bank uses the money that customers deposit in savings accounts and frequently loans it to other customers who are expected to pay interest on the loan. In return for retaining that money in the bank, users earn a portion of the interest from lending.
Once you’ve decided to stake your cryptocurrencies, you’ll get the guaranteed return when it’s due. You will also receive your return from the protocol in the staked cryptocurrency, which you may then retain as an investment offer for staking or exchange for cash and other cryptocurrencies.
However, during market crashes, price changes are common, making cryptocurrencies one of the most unpredictable investment classes. In the event that a user was staking their cryptocurrencies in a lock-in arrangement, they wouldn’t be able to sell during a downturn. Even if the value of their staked token falls, they might still lose money, regardless of the staking platform they use.
Hence, staking is an excellent choice for investors who don’t care about short-term price volatility but are concerned about earning returns on their long-term investments.
Now that we are clear on what crypto staking is, we need to clear the skepticism relating to its compliance with Islamic injunctions.
CRYPTO STAKING AND ISLAMIC TENETS
Some Islamic scholars have differing opinions on whether the staking of cryptocurrencies is morally acceptable due to its speculative composition – possessing elements of uncertainty (gharar) and gambling (maysir). Hence, when carrying out commercial transactions, it is important to adhere to the sarf (currency exchange) rules to prevent being entangled with riba (interest).
Riba is present in a financial loan where the lender anticipates profiting from the loan. Islamic laws only permit charitable loans while other types of borrowing are forbidden. Therefore, a loan of money must have been made – either directly, as in the instance of riba al-nasia, or subtly, as in the case of riba al-fadl – for the suspicion of riba to be justified.
Despite the lack of agreement over the similarities between cryptos and fiat money, it is best to be cautious and take a conservative stance by adhering to Shariah guidelines for financial transactions. Proof of Stake and riba are quite comparable in that both require generating money from money without actually accomplishing much of anything other than possessing money. Regardless, an individual who partakes in crypto staking is not borrowing his money.
As previously mentioned, staking is only a way to enable proof of stake blockchains to generate additional blocks. In Proof of Stake, funds are staked on an address, making it impossible for the owner to remove them. The owner also subscribes to validating transactions in order to aid with network security. In reality, the stake serves as a deposit because if the coin owner behaves dishonestly, they will forfeit their deposit. Hence Crypto staking is not riba. However, Riba would not be present in the case when no money leaves the depositor’s account, no one else uses the money, and no one makes it available to anybody else.
A lot of people may argue that crypto staking is like gambling because of the risks involved, as it can be likened to risking money in a valueless activity. Again, as previously mentioned; the more coins are staked the more secure the network becomes. Therefore, it is not a valueless activity.
Hence, staking cryptocurrencies is not haram. Nevertheless, Muslims are advised to do their due diligence when it comes to staking crypto. It is important to verify that the crypto project itself complies with sharia law before staking its coins. Consequently, regardless of how a cryptocurrency project employs staking, if it connects itself directly to gambling or any other act that is unlawful according to the teachings of Islam, it would then be haram to take part in such.
FINAL THOUGHTS
It is assumed throughout the Shariah discussion of staking that the cryptocurrency itself complies with Islamic laws. Hence, a crypto-asset has to be checked before participating in any staking activity and reaping the rewards of staking.
Since there are many different kinds of crypto, Muslims must check that they comply with Shariah before investing. As a rule of thumb, the following checks should be conducted:
- Verifying the legitimacy of the crypto-asset to make sure it is a real initiative and not a fraud.
- Project evaluation to confirm compliance with Shariah. If it is an equity-based token, financial screening to ensure that it complies with the financial requirements for Shariah compliance.
- Token screening, to determine whether the token complies with Shariah.
Hence, to be on the safer side, it is required that Muslims should check the token and the project to make sure it complies with Shariah or seek counsel from Islamic clerics before any staking action can be regarded as Shariah Compliant.
