Author: ALKHAZUR TAZBAEV
There are different opinions among Sharia scholars regarding cryptocurrencies’ appraisal, as we discussed in the previous article. However, this cannot be extrapolated to Blockchain technology. The concept of cryptocurrencies implies using blockchain technology as a ground, but blockchain technology and cryptocurrencies are not the same, and the legal status of blockchain technology does not depend on the legal status of the cryptocurrency. Blockchain is a type of ledger, where data is recorded and stored securely.
Thus, blockchain is a neutral technological instrument that can be used in various types of activities, not only in creating cryptocurrencies. For instance, blockchain technology can be used in Supply Chain systems to improve sustainability and reduce costs through the secured mechanism of the distributed ledger. This intrinsic feature of security in blockchain technology is possible due to the mechanism called consensus (also known as consensus protocols or algorithms). Simply, a consensus mechanism is used to reach an agreement among nodes (i.e. participants in blockchain systems) on one state of all data, as this subsequently allows them to work together and stay secure. The consensus mechanism helps guarantee that all nodes are synchronized, all transactions and recordings are legal and regularly verified. Moreover, this mechanism helps to prevent certain types of economic attack.
In other words, as Blockchain technology is deservedly portrayed as a trust machine, that state of trust is achieved via a consensus mechanism. In fact, there are different types of consensus mechanisms used to solve the issue of trust and security. A number of forms of consensus mechanisms exist to bring about different desired results in various blockchain networks, and several of them are prevalent. For example, the first blockchain network that was engendered solely for the purpose of creating and distributing Bitcoin cryptocurrency uses a consensus mechanism known as Proof of Work (PoW). It is also called mining, and the nodes in the network that are engaged in the process of Proof of Work are miners. Since the consensus algorithm provides the mechanism to review and confirm the newly entered data so it can be added to the rest of the data on the particular blockchain, and as long as we can’t rely on the miners to select who will create the next block which contains the registered data, the network instead creates an electronic puzzle. After that the miners compete to solve that puzzle using their computational power, namely computing hardware and electricity. It takes a lot of computational resources to solve this puzzle. But when someone solves it, other miners can quickly check his work, and everyone trusts that a lot of work went into solving it and producing the next block. Thus, whoever solves the problem first receives bitcoin as a reward.
Another common type of consensus mechanism is Proof of Stake (PoS). Ethereum blockchain network is expected to use it instead of PoW. This algorithm is based on using a randomized process to figure out who will get a chance to produce the next block that contains the new data. However, to be selected to verify and validate the new block, the users are required to stake an amount of their tokens (cryptocurrencies). The greater the number of pledged and locked tokens in the system, the greater the chance. As a result, the selected node who validated the new block gets a reward in the form of tokens.
There are other common types of consensus protocols, such as proof-of-activity (PoA), delegated proof-of-stake (DPoS), proof-of-publication (PoP), proof-of-retrievability (PoR), proof-of-importance (PoI), proof-of-burn (PoB), proof-of-ownership (PoO), proof-of-elapsed time (PoET), and proof-of-capacity (PoC). Recently, experts at IRTI (Islamic Research and Training Institute), Jeddah, came up with a quite intriguing consensus mechanism called “Proof of Use”.
One of those “rules of agreement” caught our attention particularly for its resemblance and similarity to a type of partnership mentioned in classic works of Islamic jurisprudence. Precisely, it is Proof of Authority. Unlike Proof of Stake protocol where nodes pledge financial capital, in Proof of Authority mechanism social capital is placed at risk. It’s a consensus model with actual identity at stake, where the validators stake their reputation on the network. As a result, only these nodes are subject to be compensated, as only they have a right to validate blocks.
As mentioned earlier, Proof of Authority resembles the partnership contract known in Fiqh as Shirkat al-Wujooh. It’s a sub-level contract of Shirkat al-’Aqd (the term Shirkat and Musharaka can be used here interchangeably), which, in other words, means a joint commercial enterprise, a partnership between two or more parties. It has three sub-categories: 1) Shirkat al-Amwal (Partnership of Wealth), where all the partners invest some capital into a commercial enterprise; 2) Shirkat al-A’mal (Partnership of Service), where all the partners jointly provide services to clients; 3) and Shirkat al-Wujooh (Partnership of Goodwill or Reputation), where the partners have no investment at all, but they purchase commodities on credit on a basis of goodwill and mutual trust with the supplier. In addition to several advantages of this latter type of partnership, it encourages individuals and companies to establish their goodwill, which, in turn, would benefit the entire society. Thus, we can observe that there is an entrancing similarity between Proof of Authority consensus mechanism in blockchain technology and Partnership of Goodwill contract in Fiqh.
– 9 Types of Consensus, Daily Bit – https://medium.com/the-daily-bit/9-types-of-consensus-mechanisms-that-you-didnt-know-about-49ec365179da
– 8 blockchain consensus mechanisms you should know about, Naveen Joshi – https://www.allerin.com/blog/8-blockchain-consensus-mechanisms-you-should-know-about
– Can We Trust the “Trust Machine”?, Sami Al-Suwailem, https://blogs.irti.org/can-we-trust-the-trust-machine/
– Islamic Commercial Law, Muhammad Yusuf Saleem.
– Your Brief Guide to Islamic Finance, Mufti Ismail Desai
– Introduction to Islamic Fintech, Mufti Faraz Adam
– An Introduction to Islamic Finance, Mufti Muhammad Taqi Usmani
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