Introduction

There are various types of cryptocurrencies, and contemporary scholars have differing opinions regarding their permissibility. One may find the general principles that render a cryptocurrency permissible in this fatwa. It is important to note that this response is only applicable to the permissible types within the broader category of cryptocurrencies

Crypto staking is an activity where a user locks or holds his funds in a cryptocurrency wallet to participate in maintaining the operations of a proof-of-stake (PoS)-based blockchain system. The proof-of-stake (PoS) consensus mechanism utilizes validators to verify transactions and maintain consequences in a blockchain network.^[1]

In principle, earning a wage in exchange for work is permissible. Staking in a blockchain network differs fundamentally from interest-based earnings, such as in a savings account.

When an individual stakes their tokens, they are not merely depositing them for passive returns. Instead, they take on an active role as a validator, which involves:

• Making themselves available to validate transactions when required;
• Selected validators create new blocks to add to the blockchain;
• Maintaining specific hardware and infrastructure;
• Ensuring a stable high-speed internet connection; and
• Bearing potential risks, such as penalties (slashing) for dishonest or inefficient behavior.

The staked tokens primarily function as collateral to encourage stakers to perform their duties with integrity. If malicious behavior or negligence is detected, validators may face penalties, including the loss of some of their staked tokens, a process known as slashing. However, the staked tokens serve more than just as a safeguard against dishonesty; they are also integral to the validation process, playing a key role in securing and validating transactions within the network.^[2]

The rewards earned from staking, therefore, are compensation for the work, time, and resources committed to securing the blockchain. This is distinct from interest (ribā), where money generates more money without any labor, risk, or productive contribution.

The type of contract between the blockchain protocol and the staker is Juʿʿāla. Juʿʿāla is a contract in which compensation is promised for the successful completion of a specific task or result. Unlike standard employment contracts, it does not involve a fixed wage or ongoing work. Instead, the pre-determined payment is granted only once the task is completed successfully. It functions as an open-ended contract, where anyone can undertake the task, but once a participant agrees and begins, the contract becomes binding. When the staker initiates the operation and starts the process, the contract becomes legally binding.^[3]

There are two primary types of staking:

1. Solo Staking; and
2. Pool Staking.

Solo Staking

In solo staking, the staker operates independently, contributing only his tokens to the operation. He undertakes all the tasks related to the staking process by himself, making him solely entitled to the staking rewards.

Pool Staking

In pool staking, multiple stakers contribute their tokens to a single pool, collectively forming one contract. This arrangement results in shirkat al-milk, making them joint owners of the pooled tokens. The participants mutually agree to appoint a pool operator, who is responsible for carrying out all validation-related tasks.

The fee structure for the pool operator can follow different models:

1. A fixed fee plus a percentage of the staking rewards;
2. A percentage of the staking rewards; and
3. A fixed fee.

Pool Operator as a Participant

If the pool operator is chosen from among the participants and the selected fee model includes a fixed fee plus a percentage of the staking rewards, he will have a stand-alone contract and will be considered an employee of the participants. This entitles him to the fixed fee. However, the portion of his earnings that is based on a percentage of the staking rewards will be treated as a commission—he will only be eligible for it if the operation is successful.^[4]

If the payment model is based solely on a percentage of the staking rewards, the pool operator—who is also a partner—will be regarded as a working partner, distinct from the silent partners. Due to his additional contributions in managing the operations, he will be entitled to a larger share of the profits, while the silent partners, in this venture, will receive profits proportional to their investments.

If the chosen model involves a fixed fee, a separate ijāra (hiring) contract will exist between the pool operator, who is one of the partners, and the other partners collectively.

Pool Operator as a Third-Party

If the pool operator is a third party, an Ijarah contract will govern the relationship. Under this contract, any of the aforementioned fee models will be considered his wage. If a percentage of the staking rewards is stipulated as his compensation, it will be permissible, while the remaining rewards will be distributed among the partners in proportion to their investments.

Conclusion

In conclusion, crypto staking, when conducted within the framework of permissible cryptocurrencies, aligns with Islamic principles as it involves active participation, risk, and productive contribution, distinguishing it from interest-based earnings. The staking rewards are considered compensation for the validator's work and resources. Both solo and pool staking models are permissible, provided the contractual agreements, whether for solo stakers, pool operators, or third parties, are transparent and conform to Islamic contractual laws.

And Allah knows best.

Ml. Nauman Muslehuddin
Student, Darul Iftaa Chicago

Checked and Approved:

Mf. Abrar Mirza
Head Mufti, Darul Iftaa Chicago