Ethereum, NFTs and Defi: Halal? Good Investments?

Non-Fungible Tokens (NFTs)

NFTs are unique, one of a kind, digital assets.

Advantages of NFTs include a feature that, when enabled, pays the creator a percentage every time the NFT is sold or changes hands. This ensures the creator gets paid, potentially in perpetuity, for their creative work with little to no effort on their end.

Are NFTs Halal?

Generally speaking, there is a notion that has been perpetuated by various commentators in the Islamic finance space that I’ve found no basis for in either the Quran or Sunnah. This notion claims a linkage between something being halal to transact in and being tangible.

In my ten years studying Islamic finance, I’ve found no support for this linkage in either the Quran or Sunnah.

Consider the case of a patent for example. The patent holder can sell the right to use the subject of the patent even though there is nothing tangible about the right which is being sold.

Accordingly, to say NFTs are not Halal to transact in because they are digital and do not exist is physical form is, in my opinion, false.

As a concept, I see no valid arguments for why NFTs, in general, should be considered haram.

Put differently, since the default ruling on everything relating to dealings is permissibility, I find NFTs, in general, Halal.

Decentralized Finance (Defi)

DeFi applications aim to recreate traditional financial services, such as lending and exchanges, with cryptocurrency.

Most of these applications run on the Ethereum blockchain.

Running on a blockchain enables these applications to operate without central control over the entire system.

Is Defi Halal?

Very simply, if the centralized version of a service is halal, the decentralized version is probably halal too.

Similarly, if the centralized version of a service is haram, the decentralized version is probably haram too.

Ethereum

For a decentralized application to truly be decentralized, no one party can control its infrastructure.

Ethereum is one attempt at building the decentralized infrastructure needed to build decentralized applications on.

To interact with applications built on Ethereum, you need Ethereum tokens (Ether). Whenever the price of Ethereum is quoted, the price of these Ether tokens is what is being referenced.

Is Ethereum Halal?

Blockchain technology, smart contracts, NFTs and decentralized applications are all technologies which the Ethereum project is helping advance.

These technologies are not inherently good or bad. Ultimately what gets built with these technologies and how they are used will determine if they end up a net positive or net negative for humanity.

Undoubtedly, these technologies can potentially be enormously useful.

This is why I think Muslims should be spearheading the drive to adopt and advance these technologies so we can ensure they are used for good.

Accordingly, I think Ethereum, more specifically Ethereum tokens (Ether), are halal to own.

Is Ethereum a Good Investment?

To make an informed prediction of Ethereum’s price, we have to analyze the two determinants of price, i.e. supply and demand.

Ethereum’s Supply:

The biggest argument against Ethereum is its monetary policy or more specifically its lack thereof.

With Bitcoin, there are 21 million coins that can ever come into existence.

At any point in time, anyone can know with a high degree of accuracy how many Bitcoins are in circulation.

Not the same for Ethereum.

The monetary policy for Ethereum has changed multiple times despite being much younger than Bitcoin.

It’s current monetary policy is designed for a very small inflation rate in the number of tokens (less than 4% a year and maybe even lower).

That said, given its history of changes, Ethereum’s monetary policy will likely change again.

This dynamism in policy for Ethereum compared to Bitcoin for example is the result of consensus in Ethereum being more concentrated than it is in Bitcoin.

Ethereum’s Demand:

Unlike bitcoin where demand is motivated by a desire to preserve value (and speculation of course), demand for Ethereum is motivated, at least in theory, by the following:

1. Utility: to interact with decentralized applications or transact in NFTs based on the Ethereum network you need Ethereum tokens (Ether).

2. Staking: this is the act of locking up your Ether tokens to secure the Ethereum network. People who stake their Ether are rewarded by the Ethereum protocol with more tokens.

If Ethereum continues to be the dominant platform on which decentralized applications are built, I think it will continue to appreciate in price in the short-term.

Long-term, I think there are some serious risks to Ethereum.

Risks:

1. Competition: Ethereum faces competition from smaller utility protocols, such as Cardano and Polkadot. Even though Ethereum is by far the most dominant protocol today, I think it’s still early to crown a winner.

2. Crashes and Hacks: The Ethereum protocol is a lot more complex than Bitcoin’s is. With complexity, comes a greater chance of something breaking or getting hacked.

In fact, Ethereum’s history includes things like the DAO event where $50 million worth of tokens were stolen by a hacker.

3. Concentrated decision making: the concentrated decision making of Ethereum makes it vulnerable to attacks and errors of judgement. In light of the history of Ethereum and how fast development is happening, it is rather plausible that an error in judgement sets the protocol back substantially.

Conclusion

For me, this is not a set it and forget it type of investment. I am certainly bullish on decentralized applications and I think their utility is potentially massive. In fact I think the potential impact that decentralization has on humanity could be as profound as the internet itself.

Ethereum is the leading protocol in the space so it made sense for me to buy a few tokens.

I understand the reward can potentially be substantial but this is commensurate with the risk involved.

Currently, I own exactly 4 Ethereum tokens, I bought them for average price of $1800 a piece mid-march 2021. 

Disclaimer:

Nothing in this article is meant to be investment advice. Make sure to do your own due diligence before making any investment decisions.

Don’t invest any money you can’t afford to lose.