Ethereum Quick Facts:

Founders: Vitalik Buterin, Gavid Wood, Anthony Di lorio, Joseph Lubin, Charles Hoskinson, Mihai Alisie, and Amir Chetrit

Date Founded: July 2015 

Current Developers: Ethereum Foundation, EthereumJS, Hyperledger, OpenEthereum, EthereumJS, and Nethermind

Max Supply: None

Pre-mined Supply (coins that were created before the currency was publicly available): 72 Million Coins

Practical Islamic Finance Rating: Comfortable

Ethereum’s Utility

According to Ethereum’s white paper, the founders intended to create a “protocol for building decentralized applications”.

Decentralized Applications (dApps), are digital applications that run on a decentralized network of computers. Since dApps are decentralized, they are free from the control and interference of a single authority. This enables dApps to safeguard user privacy and resist censorship.

Decentralized Applications are also useful because they are peer-to-peer, eliminating the need for intermediaries and as a result enabling services to be offered at lower costs.

As of the date of this article, Ethereum is the most widely used platform for Decentralized Applications (dApps).

Practical Islamic Finance concludes:

Ethereum’s utility is analogous to the utility of Apple’s operating system (iOS) which is used to build many traditional digital applications.

Similar to the apps built on the iOS platform, some Dapps can be used for haram activities.

However, we do not consider the iOS platform itself to be inherently haram considering the thousands of applications it hosts which are beneficial. For the same reason, we think the utility of Ethereum, as a platform used to create Dapps, isn’t inherently haram either.

Is Ethereum Linked to Interest-Bearing Debt?

Ethereum can accommodate applications that partake in interest-bearing activities but these applications are built on top of the Ethereum network and are not an inherent part of it. 

As Muslims, we do not consider going to a mall to be haram even if it has a bar in one of its storefronts. We simply do not partake in going to the bar while electing to shop at the other stores in the mall instead.

Practical Islamic Finance concludes:

Despite the presence of interest-bearing activities that occur on Ethereum’s platform, these activities are not inherent to Ethereum’s functionality. 

What is Ethereum’s ESG Rating?

Governance refers to the incentive structures, level of integrity and decision making processes that control Ethereum.

Decentralization

Generally speaking, it is harder to corrupt systems that are decentralized. This is because decentralization makes it difficult, and sometimes impossible, for a corrupting force to affect all points of influence simultaneously.

To determine Ethereum’s level of decentralization, we will look at three different metrics, nodes, distribution of mining power, and distribution of funds.

Nodes

A node is a computer connected to the network that stores, spreads and preserves the blockchain’s data for others to be able to use and download.

Ethereum has around 2,900 globally distributed nodes as of December 2021.

Distribution of Mining Power

The more mining power a single entity has, the more leverage it can exercise over the ecosystem.

Commonly called a 51% attack, if one actor controls over half of the block creation, they can take control of the currency itself.

As of December 2021, the largest Ethereum mining pool (a collection of miners) is Ethermine which holds 30.3% of the total Ethereum mining power, with F2Pool taking second with 18.4%

Distribution of Funds

Currently, the largest holder of Ethereum (that is not a smart contract) is Kraken with over 2 million coins. This amounts to about 1.79% of the total supply. 

Environmental

Similar to Bitcoin, a large criticism of Ethereum is the large amount of energy required to maintain and run the network.

This is being directly addressed by Ethereum’s plan to move to a Proof-of-Stake (PoS) system wherein only essential computations are required. 

Social

Ethereum enables much more complicated financial structures than its predecessors. This can potentially enable Muslims to circumvent the riba-based traditional financial system. 

Practical Islamic Finance concludes:

Ethereum’s governance structure is in line with the spirit of shari’a since it makes corruption and fraud difficult and provides a platform where we can build our own financial infrastructure that is accessible to Muslims everywhere. 

Overall we find Ethereum’s benefits and potential for good to be substantial and the cost of these benefits, especially as it relates to the environment, to be decreasing with time in light of the planned switch to a Proof-of-Stake protocol.

Comfort Rating

From Ethereum’s utility, lack of any structural reliance on riba, and ESG impact, Practical Islamic rates Ethereum as:

Comfortable to invest in from a Halal perspective.

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Sources

ETH MarketCap

Ethereum Whitepaper

Ethereum.org

Ethereum Blocks

Ethereum Mining Pools

Investopedia

Authors