If a Blockchain Uses a Proof of Stake Mechanism, Does This Make the Blockchain Impermissible for Use?

Answered by Shaykh Muhammad Carr

Question

If a blockchain uses a Proof of Stake mechanism, does this make the blockchain impermissible for use? Would it be permissible to use decentralized apps built on such a blockchain?

The most popular consensus mechanisms are Proof of Work and Proof of Stake. Many people argue that Proof of Stake involves an element of riba, as it requires staking wealth for a period of time.

Answer

In the Name of Allah, the Most Merciful and Compassionate.

I pray you are in good faith and health. Thank you for your question.

Allah says, “O you who believe, devour not your wealth between you through falsehood; but only through trade by your complete mutual consent.” [Quran, 4:29]

Proof of Stake (PoS) is a consensus mechanism in which individuals stake their cryptocurrency to validate transactions on a blockchain network. In our view, PoS involves placing one’s cryptocurrency as collateral. Receiving a reward in return for offering such collateral is not permissible under Islamic Law.

Staking cannot be configured as leasing the cryptocurrency if it is done in personam unrestrictedly. The same ruling applies if it is done in rem (in-kind), as the only recognized utility of cryptocurrency in Islamic jurisprudence is its function as a currency.

What is Staking

PoS allows validators to create new blocks and confirm transactions based on the amount of cryptocurrency they “stake” or lock up as collateral. The more coins a person holds and is willing to stake, the higher their chances of being chosen to validate transactions and earn rewards.

Staking is a way to earn rewards by putting your crypto to work on a blockchain network. In return for helping the network run smoothly and securely, you receive more of the cryptocurrency you’re staking. [Coinbase]

Staked Coins In Rem 

The first question is whether crypto coins can be held or dealt with in rem—in the legal sense of specific, identifiable property rather than in personam (a personal obligation, e.g., to return the equivalent value).

If staked coins are in rem and only serve a currency function, it would not be permissible to stake them and earn a return on them.

If the lease is unrestricted, not as a weight, adornment, or the like, the lease is invalid and becomes a loan the recipient owes. This is because a lease implies usufruct, and the usual usufruct of dirhams and dinars is with the actual coins themselves. Therefore, if the usufruct is mentioned without further specification, it is understood to refer to the customary use. [See: Bahuti, Kashshaf al-Qanna‘]

If the staked coins are in personam, meaning that the equivalent must be returned, it is clearly a loan. A return on a loan is considered interest and therefore impermissible.

It is well-known that for a lease to be valid, the leased object must be one that can be used for a permissible benefit while its physical form remains intact. This condition is not met with staking, as the equivalent is returned, not the exact same amount. Therefore, you are essentially lending it to them, which involves giving money to someone for their benefit, with the condition that it is returned with its equivalent. If the agreement stipulates that it will be returned with more, it becomes a usurious loan, which is prohibited, and one must repent to Allah.

And with Allah alone is our success.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.