Is Ethereum Halal?

November 2, 2022

Table of Contents

The question “Is Ethereum Halal?” requires a basic understanding of what exactly is Ethereum. So this is where we’ll start…

The Basics

Ethereum is software hosted on a network of computers.

Also,

Ethereum is a decentralized open-source programmable blockchain that features its own cryptocurrency, Ether.

Woah, what?

I know, there’s a lot to unpack in the previous statement so let’s go word for word:

Decentralized because, in theory, Ethereum does not have a central authority. Instead, the software is hosted on a large number of computers distributed globally.

Open-source because anyone can see the code and make their own changes. The software relies on community development and peer reviews to upgrade itself.

Programmable because Ethereum is not just for recording events that occurred in the past rather it can be used to execute complex programs.

Blockchain because Ethereum is hosted on a peer-to-peer network of computers storing information in a transparent and public way. This information storage is implemented by replicating the information across connected computers which update whenever the information changes.

As it relates to the question “Is Ethereum halal?”, more important than the technical specs above is the answer to the question “What can Ethereum be used for?”. So let’s investigate this matter:

Ethereum’s Utility

Ethereum is a software platform used to host Decentralized Applications (Dapps).

Dapps are like the apps on your phone except rather than being controlled by Apple (or some other company), they are hosted on a network of computers with no central authority.

Decentralized Applications are useful because they are peer-to-peer which eliminates the need for intermediaries and as a result enables services to be offered at lower costs. At least this is the theory behind them.

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

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

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

In fact, as of writing this article, the author of this article considers a rather large portion of Dapps on Ethereum, especially those in Decentralized Finance (Defi), to be dedicated to activities that are not sharia-compliant e.g. Lending with interest.

If the current state of Ethereum represents its maximum potential, I would be uncomfortable investing in Ethereum from a halal perspective.

However, it is my assessment that current implementations are only a drop in the bucket compared to the potential of decentralized programmable blockchains like Ethereum. Therefore, I think it would be short-sighted to declare this technology unsuitable for halal-conscious investors or developers for that matter.

What Ethereum provides, like iOS, is a blank canvas that people can use to create what they wish.

Just as there are innumerable beneficial applications created on iOS, I’m hoping the same will be true one day for Ethereum or some other decentralized programmable blockchain like it.

Is Ether Halal to invest in?

To transact on the Ethereum network you need Ethereum’s native token Ether.

Ether is used as collateral, a medium of exchange, lending and borrowing, and staking (for more on staking, see our in-depth review).

The price of Ether, like anything, is driven by the balance of supply and demand for the token.

Some of the demand for Ether tokens is driven by the desire to lend and borrow with interest as well as other services that are not sharia-compliant. In fact, as is evidenced by the top 10 Dapps shown above, it could be argued that as of today a material part of the demand for Ether is driven by non-sharia-compliant activities.

This can cause some to assess Ether as haram to invest in and profit from.

In response, I would point out that this same argument applies to most currencies. That is, the demand for these currencies could also be attributed to the demand for services that are linked to interest-bearing debt for example.

How much of the price of the U.S. dollar is tied to lending and borrowing activities?

I don’t know but I imagine a non-trivial amount.

Still, a counterargument to this would be to say using traditional currencies is a necessity. Investing in Ether is not.

This is true. However, this argument implies that the success of Ethereum is necessarily a bad thing.

Decentralized programmable blockchains like Ethereum can potentially help Muslims circumvent the riba-based traditional financial system and provide a platform where we can build our own financial infrastructure that is accessible to people everywhere.

Further, the idea of decentralizing many services seems in line with the spirit of shari’a since it makes corruption and fraud more difficult.

Conclusion: Is Ethereum Halal?

From the above analysis, we find Ethereum’s potential for good to be substantial. Therefore, Practical Islamic Finance rates Ethereum as:

Comfortable to invest in from a Halal perspective.

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