Cardano staking and why it is halal.

First off, I am writing this assuming that you have a basic understanding of how crypto currencies operate. If you have more questions feel free to reach out with any questions.

Crypto currencies are unique because they solve many major flaws in the handling of money, primarily the trust issue. In order for parties to trade there is a need for substantial trust to exist between them. Buying raw materials from China while operating in the US poses a risk to both sides. The US party could send funds and never receive the goods. The Chinese party could send the goods and never receive the money. A more common example is I could have $25 in my bank account and write 3 checks of $25 to different parties. The first person to deposit the check would be the lucky winner. These are some basic examples of a double spend, something banks cannot completely protect themselves from or their clients under the current centralized banking system.

In the Bitcoin whitepaper Satoshi Nakamoto proposed a revolutionary system to prevent the double spend. A form of consensus using multiple ledgers recording each transaction. Each ledger would compete to record transactions, and being rewarded when doing so correctly. A transparent verifiable ledger maintained by multiple parties, if someone managed to alter one ledger they would not be able to alter the rest. This process would prevent the double spend issue and allow a trustless economy to operate with more inclusion equally exposing all that participate to share the risk and reward. These ledgers were maintained using a method referred to as proof of work. Proof of work requires the people or “miners” maintaining the ledgers to commit computational power to solve mathematical or cryptographic puzzles that give them the right to record a block on the ledger. They are then rewarded in Bitcoin.

For a relatively simple system of moving funds and tracking transaction Bitcoin’s proof of work method works fine. However with the onset of smart contracts and other applications running on the chain, proof of work can cause huge back logs on the network which increase transaction fees and transaction times.

An alternative consensus mechanism was proposed by other crypto currencies that is referred to as proof of stake. Proof of work is expensive because a significant amount of power is used in computing the mathematical equations to win block rewards. Proof of Stake solves this because transactions are validated by those people who are actual owners of the currency. They delegate their stake of a currency to a stake pool and that stake pool would use the delegated currency in the same sense that energy is used by miners to be selected to record a block on the ledger. The pool is thus rewarded for this service and the rewards split amongst the stake pool members.

The reason this form of investment would be considered halal is staking with a pool is not a guaranty of a return. ‘Riba’ or interest is a fixed return leaving a single party in a transaction exposed to less risk than their counter party. Delegation is an investment in a pool operator and not a guaranty to fixed returns. Returns are only distributed to delegators if their investment is used in minting a block. It is participation in the validation of network transactions by providing computational resources to the pool. It is not a form of lending with a fixed return with no exposure to loss which is not permissible in Islam.

In a Cardano stake pool, rewards are distributed equally (proportionate to their delegation) amongst the stake pool operator and the delegators minus the expenses of operating the pool and a percentage of the return. Computer resources are being used to validate transactions and the delegation is used in the same sense as HASH/computational power is used in mining. The more delegation the better your chances of minting a block. The point of delegation is that you can’t delegate to multiple pools which is to prevent something called a Sybil attack (creating a large number of fake IDs to gain large influence over the network). This is why a pool with more stake will get more chances for minting blocks (although, the amount of stake you get is not the sole reason for becoming a leader to mint blocks). To ensure the sustainability of the blockchain networks Cardano uses Ouroboros, this protocol features an incentive mechanism that rewards network participants for their participation.

To be secure, Ouroboros requires a good number of Cardano/ADA (ADA is the native token) holders to be online and maintaining sufficiently good network connectivity at any given time. This is why Ouroboros relies on stake pools; entities committed to run the protocol 24/7, on behalf of the contributing ADA holders.

While Ouroboros is cheaper to run than a proof of work protocol, running Ouroboros still incurs some costs. Therefore, stake pool operators are rewarded for running the protocol in the form of incentives that come from the transaction fees and from inflation of the circulating supply of Cardano. As network participants are encouraged to keep their ADA locked in support of the network, value is controlled and there is less incentive to pump and dump as ADA is more useful as a mechanism of transacting and building value upon.

Staking or delegating Cardano is easy and differing from the traditional investment model, you retain complete control of your ADA and can unstake at anytime. For instructions on how to stake your ADA visit our Cardano stake pool page.

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