Is Proof of Stake like Riba?
By: Ibrahim Abu Sammy
Tags: Islam, Ethics, Bitcoin, Cryptocurrency, Consensus

The International Financial System: The Original Ponzi Scheme

This question has been on my mind a lot lately, and a couple of brothers have asked me about it. In a sense, Proof of Stake is similar to riba, because it involves making money from money without really doing much of anything- except having money.

Of course, on this point it is relevant to look at the Islamic definition of riba. Sometimes riba is translated as interest, but riba is actually bigger than interest.

If we look at the textbook definition of riba, it is unlikely that Proof of Stake can be said to fall under the umbrella of riba.

Islamic Definition of Riba

Most scholars recognized two types of riba- riba an nasiah and riba al fadl- the first relates to lending and the second to sales. Of course, there is no sale happening in Proof of Stake, so Proof of Stake’s similarity to riba would fall under riba an nasiah.

The most obvious example is loaning money and expecting a larger amount to be paid back. It also includes, however, selling something with deferred payment, with an agreement that the price of the item will increase if payment is not received by a certain date.

Now, in Proof of Stake, currency is staked on an address, meaning it is immobilized and the owner cannot remove it. At the same time, the owner is prepared to help secure the network by verifying transactions. The stake actually acts as a deposit- if the owner of the coins behaves dishonestly, they will lose their deposit.

Deposits are explicitly allowed in Islam, on the evidence of an authentic hadith that describes how the Prophet, sal Allahu alaihi wa salam, pawned some armor to Jew in exchange for an amount of barley.

From the standpoint of the investor, however, there is effectively little difference between an interest bearing savings account or a certificate of deposit, and Proof of Stake. With both, you deposit money, and with both, you receive a predetermined profit.

In the case of the savings account, you are receiving profit because your money is used by the bank to make loans which are then repaid with interest. In Proof of Stake, you are being payed because your money is being used to secure the network.

Proof of Stake as Providing a Service

Probably the strongest argument in favor of Proof of Stake is the notion that it is a service, and that the block reward is payment for that service.

The argument against goes as follows- it is generally not allowed to make money from money. Proof of Stake, like riba, has the tendency to concentrate wealth by making the rich richer and the poor poorer.

In Proof of Stake systems, the addresses with more currency staked are more likely to be the ones to have a block accepted and receive the block reward. They can then in turn stake their profits, thereby increasing the likelihood of winning future block rewards.

This is problematic from a social and moral perspective as well as a technical one. Socially, it is a problem when wealth concentrates in the hands of few people, as the inequality leads to social tensions. Also, the more power is centralized, the more potential there is for abuse of that power.

Technically, a centralized network is vulnerable. Even if the people who end up with the network power are somehow able to resist the temptation to abuse their power, there is always the risk that they could be coerced by others to do so.

Attack Scenario of a Centralized Network

For example, let’s say the Applecoin community is doing really well and is facing direct competition from the Bananacoin community. Investors currently favor Applecoin because it looks like their technology and development team is a cut above. Many people think that Bananacoin might have a better solution to the same technical problem as Applecoin, but they’re not sure.

This means Bananacoin stands to gain hugely by any perceived failure in the Applecoin system.

Now let’s say the Bananacoin devs are not particularly moral people. They jump on the dark web and hire some gangsters to kidnap one of the children of one of the main Applecoin devs. They threaten to do bad things to the kid if the Applecoin dev doesn’t conduct a 51% attack on the network. The Applecoin dev relents, word gets out that the network has been compromised, and Applecoin tanks on the markets, with much of their market cap migrating over to Bananacoin.

The point is, no matter how good the people in charge of a network are, centralization translates to vulnerability.

Winners and Losers

An important consideration with any moral judgment is harms and benefits. Ultimately, moral law is for the benefit of our own souls, and most of the time what hurts others will eventually hurt us too.

This is an area where Proof of Stake is distinguished quite a bit from riba, because in the case of Proof of Stake, the wealth that is earned by the stakers is not taken from anyone, rather it is minted by the consensus protocol and reward scheme of whatever blockchain or network they are staking on.

In the case of a loan, the borrower is forced to pay from their own wealth or labor into the pocket of the lender.

The major issue here is the problem of profiting from someone else’s loss. Anything that could lead you to want someone else to fail is not allowed in Islam, in my limited experience. Gambling is the prime example. With riba, when you have a class of people who make their living only from lending money, it means that these professional moneylenders are in a position where they can profit from misfortune that befalls others.

This is serious moral hazard, because it means that people have a direct monetary incentive to cause wars, for example, and finance the rebuilding afterwards.

You could say that the same thing goes for any business- window sellers have an incentive to break windows, because they can sell more windows as a result. Sure, there is a similarity, but-

Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest.

Surah Baqarah, 275

Regular trade is different than riba, because money influences every area of economic life.

The window seller who schemes to break people’s windows cannot amass progressively more power which he can use eliminate competition and control governments and entire populations- the professional money lender, however, can.

Of course, the wisdom of this legislation is way beyond my or anyone’s ability to fully understand. But contemplating on it can give us a greater understanding of the divine wisdom behind it.

It’s important to look at the overall effect on the system.

A debt based system, like the one most of us live in, has other problems. For example, as wealth becomes more concentrated, it is possible for those who secure the most financing to utilize competitive advantage, often with the help of government regulations, to squeeze out competition. This is because the presence of riba in a system encourages the hoarding of wealth rather than spending it, which leads to a lack of circulation which progressively increases the likelihood of catastrophic systemic failure.

Back to Proof of Stake

So in comparing Proof of Stake to riba, it is clear that many of the worst elements of riba are missing.

Proof of Stake does not have

Some people winning from the loss of others, and

Clear incentives to sabotage, victimize, or oppress others

Earning money without providing any tangible service to society

It does, however, share with riba

The tendency to concentrate wealth and power in the hands of progressively fewer people

Comparison to Proof of Work

It’s kind of silly to see Proof of Stake as haram and somehow consider Proof of Work to be better. Both have the same tendency to centralization. Both favor those who have more money and give more earning power to those who have more money.

The main difference is that with Proof of Work, you actually have to go out and buy hardware.

This definitely has advantages, because it means people have to be more committed to the security of the network, since hardware is much less liquid than currency.

From a technical standpoint and purely with regards to security, Proof of Work is undoubtedly superior. When an attacker starts gathering hash power to attack a network, difficulty increases, which drives up the price of the currency, which in turn attracts more hash power to the network, further driving up difficulty and price. Proof of Stake lacks this security.

From a moral standpoint, however, we have the same problem with the tendency towards centralization.

Conclusion

Cryptocurrency in its present state is simply not optimal according to Islamic law- it is, however a BIG improvement over the fiat (paper) currency system.

Although cryptocurrency is still very unstable due to being a new digital asset, it is still a better alternative than paper money, which is a 100% bonafide scam.

After really thinking about it, Proof of Stake is definitely NOT the same as riba, but it is also not 100% halal. However, with Proof of Stake currency, at least you have real ownership of the currency and there is no riba involved in the creation of the money, so although neither Proof of Work or Proof of Stake could be said to be 100% halal, if your choice is between paper money and crypto, crypto would definitely be preferable, in my opinion.

Even when paper money was directly linked to gold, it was still probably haram, because of the explicit requirement in Islam that you only buy and sell things that are in your physical possession. The paper money was actually a certificate of a debt, and trading in debt is generally not allowed. Now it’s even worse, because it doesn’t represent anything, and moreover, riba is involved in it’s basic issuance.

The requirement to be in the physical possession of an asset being traded does not apply in the case of immovable assets, so personally, I think the future for Islamic cryptocurrencies will be currency instruments backed by real estate or other forms of equity. This would be pretty easy to tokenize and there are legal systems in place that can enforce it.

Even if this is established, however, the question remains, how will consensus be handled? If we have these fundamental issues with Proof of Stake and Proof of Work, what alternatives are there? I thought the Stellar Consnesus Protocol might be it, but it has other issues. Right now I am leaning towards a combination of Proof of Authority/Proof of Reputation, with a pseudorandom incentivized gateway to authority. More about that in future posts.