DAOs & Islamic Finance
DAOs & Islamic Finance Are Virtually Written For Each Other
Disclaimer: This is not a Fatwa or Islamic legal ruling about the topic. This is an opinion piece that addresses the topic to provide awareness for the Islamic Community.
Islam, as a religion, has laid down various rules and principles to guide its believers (Muslims) both in worldly materialistic aspects and the spiritual part, which makes it normal when Muslims are curious about the Islamic perspective on emerging or newly developed worldly trends. Nowadays, Islamic communities are going from having doubts about technological trends to actively participating in them as long as they are applied in line with the Islamic rules and principles. For example, did you know the Islamic communities once had doubts about the permissibility of technologies such as TVs and phones in Islamic laws? Now, scholars agree that it is permissible to use, say, a mobile phone however it is haram (impermissible) to use it for illicit acts such as cybercrime.
However, will it be the same ruling for every technological trend?- A question all Muslims have been asking since the recent rise of Blockchain and Web3. Blockchain and Web3, a different breed of tech innovation, have gained massive adoption globally through their features and functionality.
These rising innovations have made the Islamic community curious about the Islamic rulings on these trends before participating in any. In our different mosques, gatherings and association, questions such as “Is Blockchain permissible in Islam”; “what is the shariah rulings on Web3” are being asked consistently. Although many Islamic scholars have said and written much about these trends, this article as an opinion piece entails the general understanding Muslims should have about these technologies. Before diving into the article, we must clarify some buzzwords around the recent technological phase.
Blockchain and Web3- The Emergence of DAO
Blockchain, a decentralized and distributed ledger, supports the recording and tracking of financial assets. This is the primary structure behind these upcoming trends. Without the blockchain, there won't be Web3 and Cryptocurrencies.
Web3 can be best defined as the type of internet ecosystem not dominated by a small number of key players as it is today. An example of those ecosystems is social media which either Facebook, Twitter or Whatsapp dominate. Web3 hopes to bring power to the mass through decentralization. The rising growth of Web3 has established the trend for developing a decentralized financial sector known as Defi. Most recently, there has been an interest in developing DAO. But, what's the view of the Islamic community on these rising technologies?
What is a DAO?
DAO, Decentralized Autonomous Organization, is an organizational-led entity with no central ownership or authority. It's an autonomous, transparent community owned by its members with the same interest. DAO pursues a common goal using the custom-rooted rules of the decentralized Blockchain technology. Through smart contracts, users transact, outsource funds, make decisions, and perform personalized activities.
DAOs are built on smart contracts — Smart Contracts are just simple lines of computer code that automatically run on the blockchain. They are independent, making them self-executable when certain conditions are met. How does the smart contract power the DAO, and how does DAO work?
Understanding DAOs better
DAO works on a consensus mechanism whereby users come together to decide the operations of the community. This section entails the process of how DAOs work and their structure.
A core team of community members establishes the rules of the DAO through the use of smart contracts. These smart contracts lay out the foundational framework by which the DAO is to operate. They are apparent, verifiable, and publicly auditable, so any potential member can fully understand how the protocol functions at every step.
Once these rules are formally written onto the blockchain, the next step is funding: the DAO needs to figure out how to receive funding and how to bestow governance. This is typically achieved through token issuance, by which the protocol sells tokens to raise funds and fill the DAO treasury. In return for their fiat, token holders/DAO members are given certain voting rights, usually proportional to their holdings. Once funding is completed, the DAO is ready for deployment.
Once the code is pushed into production, it can no longer be changed by any means other than a consensus reached through member voting. No special authority can modify the rules of the DAO; it is entirely up to the community of token holders to decide.
With decentralization, token holders can control the entity and the protocol governing them to enhance our security and a personalized internet system. Autonomous with DAO protocols, shared rules, transactions, and treasuries, ledgers are encoded and automatically executed on the blockchain network. With joint interest, this is usually best achieved by groups or individuals who come together, associate, and coordinate to achieve a specific goal.
With all we've said about DAO, does it violate the rulings of the Islamic finance system or not? Firstly, let's check Islamic finance as a whole:
Islamic Finance: Shariah-compliant Finance
Islam is close to using the pioneered system because of the available rulings which guide all their processes, divine or not. Shariah (Islamic law) constitutes a set of divine principles, beliefs, rulings, and ethical norms founded on the instructions given by Allah (the Almighty God.) Shariah guides the Muslims in a different part of their lives. It treats the matter of personal dealings, businesses, financial transactions, and worldly activities seriously as it takes the matters of belief as the basis of the religion.
According to Al-Zuhaili, "The principle is that Shariah has come to bring benefits and ward off evils." In the context of the Islamic jurisdiction on Economics and Finance, the core Shariah principles and values, which are deduced from the Quran and Sunnah (the Prophetic tradition), guide issues related to property rights, business activities, commercial and traditional contracts while prohibiting any financial activities that involve unfairness, injustice, harm or dispute among people.
The Islamic finance system has been rapidly growing the industries using the system with over $3 Trillion in global growth and invested assets. According to Gulf Business, the top world economist estimated that Islamic Finance accounts for $2 trillion annually and is positioned to grow to over $3.69 trillion in 2024.
Islamic Sensibilities are indeed on the growth track to continue attracting capital. What distinguishes Islamic finance?
Islamic finance is said to be the provision of financial services by what the Shariah Islamic law, principles, and rules have laid down from their divine and reported source. Shariah rulings do not permit receiving and paying "Riba" (interest), "Gharar" (excessive uncertainty), "Maysir" (gambling), and also short sales or financing activities that it considers harmful to society.
Islamic finance has enhanced the practice that parties must share the risks and rewards that deal with a business transaction. The transaction must have a real economic motive purpose without doubtful speculation and not involve any exploitation of the opposite party. The Islamic finance system is growing through some popular unique modes of transaction. Some of these modes include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing without interests), Takaful (Islamic Insurance.)
Compatibility of Islamic Finance with DAO
In the current era, the need for implementing blockchain technology, smart contracts, and the phenomenon of cryptocurrencies have attracted the generality of the Islamic community. With the trend to develop a Shariah-compliant decentralized financial platform parallel to a centralized financial system, CeFi has gained momentum in the Islamic world. Since blockchain technology and smart contracts have been launched and it has encountered further developments, many people have questioned whether their usage is Shariah-compliant. The root of rulings in Islam is based on the divine source-Allah. The religion has told its followers what they shouldn't do or move near to, which has been prohibited, called "Haram." So anything that falls under what is prohibited for the Muslims will be abstained from because it contradicts their religious basics. Now otherwise to what you're thinking, have they been told what must be done or what's lawful for them? No! "Everything is lawful except what has been said to be prohibited." is one of the general stances in Islam. And the Prophet (PBUH) said: "The lawful is clear and the unlawful is clear, and between the two are doubtful matters about which many people do not know…."
The Islamic jurisdiction on lawfulness and unlawfulness is based on the Islamic laws guiding the Muslims. The law can be easily understood as: the prohibited or unlawful things have been stated, and anything outside of that is opposite (lawful). And Allah has said in the holy book: "God has permitted trade, and forbidden interest/usury (Ribah)..." - Quran 2:275.
So with this understanding of the Islamic basics of their jurisdictions, let's check the permissibility or DAO in Islam. Before that, the rule on the technology itself is that anything in the tech world that will lead us or is built on what Islam has prohibited, then every Muslim must abstain from it. But anything in the tech world that doesn't violate the beliefs and oppose the Shariah is permissible in Islam. That's how Muslims have maintained relationships in their communities and among the leading people in the tech and financial world.
The Islamic/Shariah Perspective on DAO
The foundational Shariah opinion on such newly developed technological developments is "Permissibility" unless Shariah rules and principles prove it wrong, it is permissible.
Similarly, DAO is permissible because its structure has nothing inherently conflicting with the Shariah. Although different people have different opinions about DAOs mainly because they are related to democracy, democracy is not permissible in Islam when it is governed by rulings and laws different from Shariah. However, DAOs managed by an Islamic community can and will formulate the laws guiding the protocol based on Shariah. Although, it is the usage of such technology that may be permissible or impermissible. A group implementing a DAO system only to walk the path acknowledged in the Shariah. It abolished the non-shariah complaints sector, making it permissible in Islam. When Muslim communities come together with the same aim, interest, and goals with highly dedicated global communities will enable the growth of a Shariah-compliant DAO that will maintain the rulings of the Islamic judging between them and also improve foreign partnership and peaceful collaboration without any bias.
Did you know the $3 trillion global Islamic finance industry is expected to grow 20% - 25% yearly? Because of several features, Islamic finance has exhibited an immense potential to transform the global financial landscape in recent years, with the non-muslims adoption and participation in Islamic finance skyrocketing. A large number of non‐Muslim participants in Takaful schemes in Malaysia is an often-quoted example. To sum up, clarifying the DAOs mission and purposes will determine the Islamic ruling's stance. Also, the immense opportunities different DAOs pose to the Muslim societies may include powering smart Shariah-compliant investment, blockchain-based Shariah-compliant Takaful, Islamic-based DeFi, and smart contracts.In a nutshell, if the DAO and its blockchain structure are Shariah-compliant, then it may be permissible for Muslims to participate. Shariah-compliant DAOs will not only integrate the Muslim societies into the halal-based blockchain activities but also help expand Islamic finance. Then, how about joining a Shariah-compliant Takaful (Insurance) on Blockchain?
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