Is Crypto Staking Halal or Haram? – In depth Islamic Finance Perspective

In the simplest terms, crypto staking means “locking up” or holding your cryptocurrency for a certain period of time to earn rewards.

Those who stake their cryptocurrencies help support the operation of the blockchain. Staking is how Proof-of-Stake (POS) cryptocurrencies maintain a functioning network ecosystem.

All cryptocurrencies are built on a technology called a blockchain. Many blockchains use a POS consensus mechanism to add new blocks to the blockchain. Staking is a process that helps ensure that only legitimate data and transactions are added to the blockchain. The cryptocurrency owners offer to lock up sums of cryptocurrency in staking as insurance. In return for staking crypto, the owners earn more cryptocurrency.

What’s a Proof-Of-Stake Cryptocurrency?

There are two ways of adding blocks to a Blockchain. Firstly, there are Proof-of-Work (POW) consensus mechanisms. These require participants to solve complex encryption puzzles, in order to mine new blocks and verify transactions for which they will be rewarded. The most famous POW cryptocurrency is Bitcoin. Secondly, there are Proof-of-Stake consensus mechanisms, with major POS cryptocurrencies including Ethereum, BNB and Solana. 

How Does Staking Work? 

You can stake your tokens if you own a POS cryptocurrency, such as Ethereum. One of the easiest ways to get started is through a staking platform or by setting up a cryptocurrency wallet that supports staking.

Each blockchain has a set of rules for stakers or validators. For example, Ethereum requires each validator to hold at least 32 ETH. A stake doesn’t have to consist of only one person’s tokens—a staking pool allows owners to combine stakes with others rather than having each person come up with that number of coins.

How Much are Crypto Staking Rewards?

The rewards will differ from one cryptocurrency to the next, as well as the time it is held for staking. However, it is typical to see annual percentages in the 5% to 10% range, and I have seen them as high as 25%.

What Are the Risks of Staking? 

 When the cryptocurrency is locked up for staking, the owner cannot sell it. While a 5-10% reward may feel high, cryptocurrencies are volatile, and their value can fluctuate much more in that period.

Let’s start by looking at the principles of shariah-finance.

Islamic finance is a broad topic, but here are some of the main principles underlying Islamic finance:

• Money is a medium of exchange, meaning that transactions must have an exchange of goods or services. (This is why interest, or Riba, is banned.)
• Islamic finance prohibits participation in harmful or un-Islamic sectors, for example, alcohol or gambling.
• Halal investing encourages participation in sectors that benefit society.
• A venture’s profits and risks should be appropriately shared amongst parties.

Many Islamic countries now allow brokers to offer cryptocurrencies within their borders and allow their citizens to hold them. There is still some dispute about whether cryptocurrencies are Halal, but there is some level of adoption.

This is the big question. It’s a newer area, and there is not a blanket consensus, but here are some of the key thoughts by Islamic scholars in the field:

• Staking aligns well with the Shariah principle of earning income through actual work or effort as participants actively contribute to a Blockchain’s operations
• Many staking models have elements of governance where stakers have voting rights or influence over a Blockchain’s future development. This aligns with the Islamic notion of earning through meaningful participation.
• Staking encapsulates the Shariah principle of earning income from ventures involving risk and responsibility.
• Stakers participate in risk (rather than receiving interest without risk) because they face the volatility of their staked assets.
• Staking is more environmentally friendly and sustainable than energy-intensive Proof-of-Work Blockchains. for maintaining and operating blockchain networks. This aligns with the Islamic emphasis on stewardship and responsible resource management.
• Islam emphasizes the equitable distribution of wealth and opportunities. Staking is accessible to a broader segment of society.

Technological Advancements and Sharia Compliance

Not all Cryptocurrency transactions are Halal or Haram—it very much depends on the situation. Just as the stock market is seeing technology, such as screening tools, to help ensure Halal participation, cryptocurrency will soon see similar technology. 

Potential for Islamic Crypto Products 

The Islamic finance space is continuously growing, and crypto is no exception. According to a 2022 paper posted by Qatar University, “Blockchain has the ability to mediate and harmonise differing sharia-compliance regimes, thus opening up a single digital market for Islamic financial products and services.”

Crypto staking allows investors to earn additional rewards by locking up their cryptocurrency for a period of time. The rewards are compensation for their cryptocurrency participating in the validation and security process of POS blockchains, which are core to its operations and growth. This sits well with shariah-finance principles because the reward is earned through the participation of an operation, and there is risk in the venture (rather than a guaranteed return in the form of interest). The major risk is being unable to sell the asset during the locking-up period.