Decentralized finance (DeFi) on the blockchain has been known to allow anyone regardless of economic status to participate. However, the current DeFi ecosystem that we know today is mostly interest-based or not halal. This goes against the values of faith-based and ethically conscious communities.
For many Muslims, Islamic finance within traditional banking is the only banking system that they can rely upon. However, there is still the issue of accessibility as it still requires verification and third-party control.
So what if we combine the ethical principles of Islamic finance and the inclusivity that DeFi provides? Can there be Halal DeFi? Let’s find out.
Understanding DeFi vs CeFi
Decentralized finance (DeFi) is a term used in the web3 space as a distinction from Centralized Finance (CeFi).
CeFi generally refers to any financial institution that operates via a centralized entity. This includes traditional financial (TradFi) systems. In the crypto world, such systems are merged with blockchain-based protocols, providing users with centralized services for crypto-based investments. Funds are managed by specific rules set by the centralized exchange and users do not own private key access to their wallets. Some popular CeFi exchanges include Coinbase, Fairlay, and BlockFi.
Advocates of decentralization wanted an alternative to CeFi that is free from intermediaries, offering complete transparency and ownership. As such, DeFi systems have been created using smart contracts whereby transactions are made on a peer-to-peer level with blocks of code as evidence.
While CeFi requires access to users’ identity details and location, DeFi is completely anonymous. Users are the sole custodians of their funds and can access financial services through a simple DeFi wallet like the Sahal Wallet. Examples of DeFi projects include Uniswap, Polygon and MRHB Network.
The Need For Ethical DeFi
As an emerging technological solution, DeFi has solved many problems of the traditional, institution-dependent financial system. The advent of web3-based business and communities has added fuel to the rapid demand for sophisticated financial services in the digital space. Investors today seek to combine ease of access with efficiency and transparency, which is now possible through the blockchain.
Given this scenario, the questions that faith-conscious investors ask revolve around the ethical practice of DeFi as a financial vehicle.
Can code-controlled cryptocurrencies be monitored and cleared of their non-Islamic elements?
We know that Islamic Finance has been implemented within TradFi to avoid interest-based financial activities and uphold halal standards. If CeFi can be brought to the web3 space and TradFi transformed to DeFi, surely Islamic Finance can also be adapted onto the DeFi realm.
What Is Halal DeFi?
Halal DeFi is a fairly new idea that incorporates the ethical and halal principles of Islamic Finance onto the open and accessible DeFi system. MRHB is pioneering this effort via its ecosystem of financial offerings including the listing of halal crypto on Sahal Wallet. This is helping faith-based and unbanked communities to participate in web3.
So can “Halal DeFi” actually be implemented? In other words, can DeFi be halal?
Well, there is nothing non-halal about DeFi per se. But what we need to be aware of is whether the activities within DeFi are halal.
In MRHB, there is a Shariah Governance Board (SGB) which consists of a group of scholars well-versed in Shariah, finance and crypto. The role of the scholars is to assess and analyze each crypto token and protocol and determine whether they are halal or not. All halal crypto that has been screened are added to the Sahal wallet.
What Makes DeFi Halal?
While the SGB conducts very detailed and comprehensive analyses, they can be summarized as follows:
- In order for a DeFi protocol to be compatible with the principles of Shariah, the cryptoassets must only be used for ethical activities. Any projects involved in prohibited activities such as drinking, pork consumption, gambling, or usury are not deemed halal.
- Interest-based lending is not permitted within the Islamic ruling. Since many DeFi lending protocols pursue this model of receiving interest, it is vital for halal-conscious investors to avoid them. To create opportunities for investments that are backed by underlying asset appreciation, a halal investor must choose cryptocurrencies that do not engage in unethical lending.
- Islamic finance bolsters the idea of shared prosperity and financial inclusion. Wealth creation should lead to productive development whilst reducing poverty and exploitation of the weak. The principle of risk sharing between borrowers and lenders derives inspiration from this rule. As such, if a protocol promotes this activity, it can be considered halal.
- Instead of creating debtors and creditors, halal finance must build productive relationships that increase real-world output. DeFi projects can foster this idea by creating pooled-investment funds where parties use their assets to grow a shared commodity in the real world. Agriculture, food security, building infrastructure, and manufacturing are some examples of assets that a halal DeFi token can support.
Why Halal DeFi Is The Future of Finance
The global financial system is constantly developing financial services that can accommodate greater diversity of thought and investment goals. As such, the role of Islamic finance in forming a stable and resilient framework of economic growth cannot be ignored.
Ongoing trends in the realm of DeFi are focused on increasing convenience, reliability, and speed through the digitization of assets. Conscious investors can contribute to creating a better future by utilizing the efficiency of DeFi to spread the ethos of Islamic finance.
The following are key indicators that show why Halal DeFi should be the future of finance:
1. Ease of access and inclusive finance
What separates DeFi from traditional finance is the simplicity and seamless accessibility it offers to new investors. The blockchain does not discriminate on the basis of location, nationality, religion, gender, or net worth. Any individual with an internet connection can log into a DeFi wallet without any extra cost of entry. Furthermore, participating in DeFi is completely safe as your data and identity remain secure and private.
2. Tokenization of precious and illiquid commodities
Halal DeFi gives you an edge over banks and centralized institutions by helping you build wealth through investing in tokenized commodities. With borderless and frictionless transactions, anyone can invest in token-backed commodities on the blockchain.
3. Transparency and trustless finance
With DeFi, you become the sole custodian of your money. Transaction and fund management are backed by code-based programming i.e., smart contracts on immutable blockchain technology. You no longer need to rely on the good conscience of money managers or middlemen in CeFi, costing you a lot more than necessary. What’s more, the interest-free aspect of halal DeFi promotes a just and inclusive financial system.
MRHB: World’s First Halal DeFi Network
Halal DeFi has a potential to become a powerful force for ethical wealth creation. Driven by the voices of the over 1.7 billion unbanked and the increased demand for decentralized Islamic Finance from faith-based communities, MRHB was thus created.
Join the MRHB community in building a halal DeFi future that is accessible and beneficial to all. Download Sahal Wallet app to start your halal crypto journey today.