Is Frax (FRAX) Halal or Haram?
Shariah compliance review of Frax (FRAX) by Islamic finance scholars at EthicalNode, with separate verdicts for trading and for staking.
Trading verdict: Comfortable
Frax is an algorithmic stablecoin where the developers have aimed to address all previous shortcomings. The protocol is algorithmically backed, meaning that FRAX is, for example, 80% backed by USDC and 20% by FXS (the native token of the protocol). This ratio can vary from 1:1 (full reserve) to 0:1 (no reserve). The algorithm dynamically adjusts the ratio based on market demand for FRAX. More sellers than buyers = larger reserve; more buyers than sellers = smaller reserve. Essentially, the algorithm asks, 'Does the market believe they can exchange $1.00 of FRAX for $1.00 of US dollars? In principle, there is nothing objectionable about the creation of FRAX from a permissibility standpoint, and there are no interest charges associated with issuing the stablecoin, but the algorithms must withstand the test of time. <br><br>Reliability is below average. The innovative technology inherently raises caution. A report from S&P Global confirms this status. It is advisable to use the stablecoin within reasonable limits. [S&P Global Report](https://www.spglobal.com/_assets/documents/ratings/research/101590842.pdf)
Staking verdict: Non-Comfortable
Frax lacks a conventional reward system or direct economic incentives, as its coin supply is managed via a smart contract. There is no mining or staking for this token. Any instrument that claims to be "staking" for USDT token is not legitimate, which is why it is impermissible to use. <br><br>However, we are not talking about other pledge or liquidity instruments that involves Frax. It will have a separate ruling.
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