Is Staking Crypto Haram? – An Islamic Perspective

The market for digital tokens has seen an explosion of interest in recent months. A growing number of crypto enthusiasts are also exploring the option to invest in digital tokens by acquiring stakes in the projects they believe will be successful. Staking tokens is a means to profit from investing in virtual currencies and comes with specific risks and rewards. The Islamic financial principle of risk and return is an important factor when examining almost any financial transaction, including pledging tokens as part of a staking contract. Many Muslims have asked whether or not it’s permitted to stake tokens as a way to make money from investing in cryptocurrency. In this article, we’ll be exploring the topic of staking crypto from an Islamic perspective, both from the view of haram (forbidden) and halal (permitted).

What is Staking?

Staking is a type of contract where a person pays a certain amount of tokens to someone in exchange for a percentage of their future revenue. The most common example of this would be a company issuing a dividend where token holders are entitled to receive a certain percentage of the company’s profits. While there are lots of different variations of staking, we’ll be focusing on the most common example: staking tokens for a percentage of a project’s future revenues. The person receiving the tokens is referred to as the “host”, while the person paying the tokens is the “guest”.

Staking and Islamic Finance

All major schools of Islamic Finance have agreed that an investment is a contract of risk and reward, where both parties make a promise to each other, either explicitly or implicitly. This can be seen in the examples below: The investor agrees to give money to the company that is developing a product. In exchange, the company agrees to do their best to develop the product and make a profit. In the context of cryptocurrencies, staking tokens is an investment and therefore subject to the Islamic financial principle of risk and return. This means that the staking contract is an agreement between the host and guest where both parties agree to provide one another a reward for taking on a risk. In the case of staking, the host is taking on the risk of running the project and delivering the results, while the guest is taking on the risk of losing their investment if the project fails.

Is Staking Crypto Haram?

All financial transactions should be evaluated against the principles of risk and return and the prohibition on interest. The risk-and-return principle plays a significant role in determining whether a financial transaction is permitted or haram. In the case of staking tokens, the risk-and-return principle is based on the risk of failure versus the expected rewards. The expected return can be calculated by estimating the percentage of revenue a staking contract entitles the guest too. When considering the risk-and-return principle, we must also evaluate the contractual terms between the host and guest. A key element is if the contract is revocable or not. If the contract is revocable, then it’s likely that it violates the prohibition on interest as the host is receiving a guaranteed return even if the project fails. However, if the contract is non-revocable, then the risk and expected rewards are nearly equal between the host and guest. Non-revocable staking contracts can be considered halal unless there is evidence that the terms are heavily skewed in favor of the host.

Is Staking Tokens During the ICO Haram?

The prohibition on interest applies to any contract that guarantees a return regardless of the outcome. The terms of an ICO are usually revocable, meaning that the host could revoke the staking contract and return the tokens without any penalties. These types of staking contracts are almost certainly haram and should be avoided.

Is Staking Still Halal If There’s No Profit?

This question is related to the Islamic principle of “no harm”. The principle of “no harm” states that a financial transaction is only permissible if all parties involved are not harmed. This means that if the terms of the staking contract are not equal, then it’s not permissible to engage in a staking contract. This is where the question of revocability comes into play. If the terms are heavily skewed in favor of the host, it is likely that the contract is not halal and should be avoided. If the contract is non-revocable and the terms are equal, then it is permissible to participate in the staking contract.

Conclusion

All major schools of Islamic finance agree that an investment is a contract of risk and reward, where both parties make a promise to each other. In staking tokens, both the host and guest take on risks and promise to deliver rewards to each other based on the success of a project. In order for staking to be halal, it’s critical that the contract is non-revocable and the terms are equal. A staking contract that is non-revocable and where the terms are equal is permissible to engage in.

Note: This is not financial advice. This how-to article is for educational purposes only. Please note that cryptocurrency is a highly volatile asset class; only invest what you can afford to lose.