We know that stablecoins offer price stability, but can we call them Halal Crypto? This question is key to knowing whether stablecoins are safe for the faith-conscious investor. To understand the answer, we need to learn what exactly are stablecoins and what determines their ethical position.
Can we leverage the risk-free nature of stablecoin tokens to create investment options that satisfy the tenets of Islamic finance? Let’s find out.
Definition of a Stablecoin
Stablecoins are a class of cryptocurrencies whose value relates to another asset class such as fiat or commodity to increase its price stability.
The aim of stablecoins is to provide an alternative crypto investment that is low in volatility as compared to most popular cryptocurrencies such as Bitcoin (BTC) and Ether (ETH).
The Significance of Stablecoins
A currency should remain relatively stable if it’s to serve as a reliable medium of exchange. When it comes to cryptocurrencies, the most popular ones like Bitcoin suffer from high volatility. Wild intraday swings of more than 10% within a few hours are common for such currencies.
The unpredictability of cryptocurrencies which tends to fluctuate greatly within the short term makes them a risky asset. To resolve this problem, stablecoins pegged to traditional assets are created.
The most significant function of stablecoins is to provide steady crypto tokens to investors who do not wish to succumb to price fluctuations and retain the purchasing power of their digital assets.
Types of Stablecoins
The future of finance is digital. Many businesses and new-age investors consider stablecoins to be a decentralized alternative to government-owned fiat currency. Based on the asset class they are pegged against, stablecoins have four broad types:
1. Fiat-collateralized Stablecoins
Fiat is a popular collateral for stablecoins. A reserve of fiat currency such as the US dollar, Euro, or Pound is maintained as collateral assurance. The reserves for fiat-collateralized stablecoins are kept with independent custodians. To ensure price parity, these currency reserves are regularly audited and mapped by specialized software. TrueUSD (TUSD) and Tether (USDT) are some examples of stablecoins backed by US dollar reserves.
2. Metal-collateralized Stablecoins
Valuable metals such as gold and silver serve as collateral for certain stablecoin tokens. Precious metals are intrinsically valuable commodities and stablecoins backed by them are considered to be an off-chain asset. This means that the value of such stablecoins remains independent of blockchain currency movements and is maintained at parity with the prices of the metals they are pegged against. Digix Gold (DGX) is an example of such a stablecoin.
3. Crypto-Collateralized Stablecoins
Some stablecoins use other cryptocurrencies as collateral. Such stablecoins take certain measures to avert volatility and unexpected fluctuations. One such measure is to maintain excess collateral or overcollateralize holdings i.e., the value of cryptocurrencies kept as reserves far exceeds the value of the stablecoins issued. For example, the Dai stablecoin is backed by Ethereum and other cryptocurrencies which are stocked at 150% of the actual Dai coins in circulation.
4. Algorithmic Stablecoins
As the name suggests, an algorithm, a computer program running a preset formula controls the value and supply of this class of stablecoins. Algorithmic stablecoins may or may not be collateralized and offer the topmost level of independence and decentralization. The creation of new algorithmic stablecoins is synchronized with the rise in their demand. This could be a setback as in times of crisis, the value of these stablecoins may plunge and may lose its peg to an asset as happened to TerraUS (UST).
Are Stablecoins Halal?
The relatively risk-free nature of stablecoins makes them an attractive investment option. Precious metals and commodities offer a smart bet for protecting your wealth from inflation and the risk of collapse in the traditional market.
That being said, stablecoins are a safe solution to digitally verify your asset ownership and guard it against any government interference.
Stability is a key feature of stablecoins, but are these tokens halal?
In general, the objectives determine the ethical soundness of currencies. Along with this, it is also important to ensure that the underlying collateral for its valuation is an unambiguous commodity or growth-oriented activity.
To ensure that there is no deception or uncertainty involved in the tokens you choose, it is crucial to do background research about their origins and investment codes. To conduct business with such tokens, faith-conscious individuals need assurance that their earnings will maintain value and be used for a socially beneficial cause.
Discover Verified Halal Stablecoins with MRHB
We may not have all the time in the world to research every stablecoin there is. This is where MRHB comes in to help. With the expertise of the MRHB Shariah Governance Board and the creation of the Sahal Wallet that filters out non-halal crypto, you can easily find out if a stablecoin is halal.
The Sahal Wallet is a one-stop solution to enjoy doubt-free access to halal crypto tokens. All coins and assets on Sahal are guaranteed ethical and halal investment options as they have been screened by the MRHB Shariah Scholars. What’s more, you can also invest in tokens backed by physical commodities such as gold and silver on TijarX, accessible via the Sahal Wallet app.
With its easy-to-use interface and self-custodial nature, everyone can download Sahal Wallet and join in making the world of decentralized finance ethical!