Assalamu Alaikum!
What rulings do we have about the permissibility of participating in Proof-of-Stake consensus protocol?
الحمد لله رب العالمين، والصلاة والسلام على رسول الله، وعلى آله وأصحابه واتباعه ومن استن بسُنته إلى يوم الدين.
Let’s start with two important points:
1) Not every “staking” is part of the Proof-of-Stake consensus protocol. Below, we will outline three possibilities for participating in so-called “staking.”
2) Not every Proof-of-Stake protocol leads to the same conclusion.
Why is Proof-of-Stake not like “Riba”?
In the last post, we mentioned that the Proof-of-Stake consensus protocol is a method of authenticating transactions in new blocks and ensuring that all calculations of users funds are correct.
The “stake” of funds in this protocol acts as a pledge, making the validator responsible for their role, which involves writing and calculating the outcomes of transactions on the network.
There is no debt involved in this process. This pledge is not taken by anyone; instead, the blockchain program locks these funds. The validator cannot access the funds. The delegator (client) can only withdraw it himself after waiting for 21, 14, or 28 days.
The rewards for this activity are generated simply by crediting the newly emerged cryptocurrency to the account of the server (i.e., the validator) that performed the computation of the last transactions into new block. Income from Proof-of-Stake is a form of payment for services rendered.
There is another distinction between Proof-of-Stake and forbidden interest. In “Riba” or usury, there is a tendency for the rich to become richer and the poor to become poorer. In that case, the poor returns more than what one has borrowed. If someone were to accuse Proof-of-Stake of this, we must clarify that in the case of the consensus protocol, the rewards are not a result of debt, as previously mentioned. The income is not taken from anyone’s account but is instead generated within the system, resulting in an emission of new coins. Moreover, validators bear the risks of price volatility in the market, as well as the risks associated with maintaining the server, which must remain constantly active.
This is why there are three situations outlined by Shaykh Joe Bradford:
1) You participate in so-called “staking” that has nothing to do with the Proof-of-Stake protocol.
In that case, you give your crypto assets to another party, which takes them and pays you an interest rate, similar to a cash-on-cash loan. This is Haram.
In this scenario you provide the capital, and they guarantee to return it along with a premium, regardless of whether you contribute any work, and regardless of whether they make more or less than the quoted rate.
2) The other party pays you from the crypto purchased by new coin holders. This is Haram.
If they take your coins and pay you from the coins of new buyers, it constitutes a Ponzi scheme and is considered misappropriation of others’ wealth (Arabic: أكل أموال الناس بالباطل), which is not permitted.
3) The legitimate consensus protocol that is called Delegated Proof-of-Stake.
The other side takes your crypto and use it to verify the blockchain and help compute on the virtual machine / network. This is Halal.
If “staking” means to take your crypto and add it to a node to verify transactions, contribute to security, and provide computing functions AND your participation and rewards are not guaranteed but are contingent on selection and contribution criteria, then you are partnering with them and this is permissible.
On the ethicalnode.com there is a list of cryptocurrencies where you will see whether or not it is comfortable to participate in POS of specific blockchain according to an analysis that is based on shariah standards.
You can register and invest in Proof-of-Stake from this very same website, by clicking Open App. In catalog you will see the blockchains enabled for staking.
You can send the coins you want to stake on our non-custodial Ethical Wallet though original blockchain of the token and click the “Stake” button to delegate your funds to staking protocol.
