Liquidity mining has ignited fiery debates in the world of Islamic finance. For example, scholars are currently hotly disputing whether or not it fits with Sharia law. The only question at the heart revolves around the new way of earning money through cryptocurrency follows Islamic principles or goes against them. Further, we need to explore the mechanics of liquidity mining. It’s important to understand how it works in concordance with Islamic financial principles.
In liquidity mining, users stake their cryptocurrency tokens in a liquidity pool. This pool is powered by an Ethereum based smart contract that allows for instant, efficient, and low-cost token exchanges. To know whether liquidity mining is halal, you must extensively research how the earning structure is designed. Beyond that, consider what type of assets are in the mix and how the underlying contract is structured. Each case should be judged on its own merits on how it complies with Shariah governing finance.
Islamic finance disallows any practices that deal with Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling). In order for liquidity mining to be halal, the risk has to be distributed equitably among liquidity providers. This has the important implication that no returns can be guaranteed and that sustainability providers need to be at risk of losing money. Real decentralization is needed now more than ever. It helps to ensure that no one organization can exert outsized influence, such as the authority to arbitrarily freeze money.
Liquidity pools consisting of tokens with credit-based or interest-related origins are not allowed in Islamic finance. Similarly, any liquidity mining activity that guarantees returns or shields providers from downside contradicts the principle of uncertainty-sharing, a cornerstone of Islamic finance.
"Those who consume interest will stand [on Judgment Day] like those driven to madness by Satan’s touch. That is because they say, 'Trade is no different than interest.' But Allah has permitted trade and has forbidden interest." - Surah Al-Baqarah 2:275
Other cryptocurrency trading practices such as crypto spot trading, crypto day trading, and crypto leverage trading ignite a lot of discussions in Islamic finance. Worries about speculative behavior and the use of capital, borrowed or otherwise, further stoke this fire. On top of this, Zakat, the compulsory Islamic charity, applies to the liquid mining income that is in reality obtainable and spendable.
Liquidity mining on platforms that provide fixed income or uncertain smart contract conditions are widely viewed as contrary to Islamic finance. With DeFi changing at an exponential rate, Shariah reviews of liquidity mining activities need to be continuous. Yet a one-time ruling is not nearly enough to catch up with the ongoing advances and mutations still taking place in this artistic space. Islamic scholars are rigorously analyzing if liquidity mining falls under the categories of Riba, Gharar, or Maysir to confirm that these activities are compliant with Sharia principles.
