ALGO

1. What is Algorand Blockchain and ALGO token?

Algorand blockchain is a decentralized and open-source network that offers the infrastructure for developing decentralized applications (DApps) directly on layer 1. Algorand is designed to be energy-efficient with instant finality and high throughput, hence aiming at solving the blockchain trilemma of speed, security and scalability.

The network was launched in 2019 by MIT computer scientist Silvio Micali.

The ALGO token is the native cryptocurrency of the Algorand blockchain. The token is used for transaction fees, staking, rewards and governance on the network.

The maximum supply of ALGO tokens is capped at 10 billion. Algorand’s market cap is currently $2.6 billion, ranked no. 55 on Coingecko.

2. Algorand Consensus Mechanism

Algorand consensus operates through its invented variation of the Proof-of-Stake (PoS) mechanism, called Pure Proof-of-Stake (PPoS). While in other PoS varieties, a user must lock up their tokens, in Algorand’s PPoS the user maintains control of their ALGO keeping them in their wallet at all times.

Algorand PPoS runs on a two-stage block production process: the block proposal and block finalization.

In the block proposal stage, a Participation Node is selected to propose a new block, depending on its ALGO stake. This is done through a mechanism that randomly and secretly selects a block leader, called the Verifiable Random Function (VRF).

In the block finalization stage, the consensus protocol elects a rotating validator committee that checks for errors in the block. If the committee finds no instances of double-spending or overspending, the protocol adds the block to the blockchain.

The protocol can tolerate malicious actors, and avoid forks and double spending, as long as a supermajority of the stake (over 2/3) is held by honest participants.

Staking

There are four types of staking:

1. Solo staking, where you can independently participate in Algorand’s consensus by staking your ALGO and running your own node.
2. Liquid staking, where users are typically asked to deposit ALGO and mint new tokens that represent the ownership and value of the staked ALGO and can be used across the DeFi ecosystem.

• Staking pools, which enable groups of individuals to participate in consensus together. Users are able to stake their ALGO to a validator and get rewarded based on the rewards the validator receives.

1. Delegated staking. In delegated staking, users delegate a participant to run a node on their behalf while their ALGO remains in their wallet at all times.

To democratize participation in consensus, the second and third types can be done with any amount of ALGO. Yet, the first and fourth types currently require a minimum of 30K ALGO.

In Algorand, there is no slashing. In case of ineffective presence or malicious behavior, the participant is removed from consensus and forgoes rewards, but their staked amount of tokens remains intact. Rewards are a function of the amount of blocks produced.

3. Use Cases of Algorand Blockchain

Algorand can support a wide range of applications. Here are some key use cases:

• Defi: Algorand allows the development of DeFi protocols such as lending, borrowing, swapping and decentralized exchanges.
• NFTs and Games: NFTs enable ownership, collecting, and community. Blockchain gaming enables ownership of in-game items and rewards players for participation.
• Supply chain: Algorand offers traceability and tracking solutions for products, to ensure transparency and authenticity.
• Data traceability: Algorand enables following the path of real-world data from origin to destination, providing comprehensive data visibility.
• Tokenization: Algorand can be used for asset tokenization, such as real estate and financial instruments, providing enhanced transparency, increased liquidity and accessibility to real-world assets.
• Identity: Algorand can be used to build secure and verifiable digital identities, that can be used in healthcare for example.
• Finance and Payments: Algorand’s speed and low cost make it an option for various payment needs, including retail and public transportation.
• Stablecoins: Algorand is suitable for stablecoins, through low transaction fees and instant settlement.
• Impact: Algorand allows carbon efficient verification with enhanced trust and transparency.

4. Use Cases of ALGO token

Main uses of the ALGO token include the following:

• Fee Token: Used to pay transaction fees on the Algorand network.
• Governance Token: Used to participate in governance decisions affecting the network.
• Staking: Used in any of the types of staking mentioned above.
• Rewards: Used to reward validators and stakers.

5. Shariah Screening

In this section, we will assess some aspects of the Algorand blockchain from the Shariah standpoint and subsequently draw Shariah’s ruling about the exchange and use of the ALGO token. This screening is based on the Algorand whitepaper and other information published on the Algorand website.

ALGO’s Shariah compliance will depend on assessing the following elements:

• The project
• Legitimacy
• Is ALGO a currency?
• Underlying Relationships
• Use Cases

• The Project

Algorand blockchain is a Layer-1 open-source network that offers the infrastructure for developing DApps, aiming at solving the blockchain trilemma of speed, security and scalability, with no focus on a specific type of applications. This goal per se does not conflict with the Shariah objectives and adds value to the Web3 world.

• Legitimacy

Algorand website provides highly detailed information about the protocol and the underlying processes and mechanisms as well as the use cases and network metrics. The founder of the network is a reputable MIT professor, which provides the network with a solid academic trust.

According to Certik Skynet, the platform security score as of date is 85, graded A. Algorand’s core protocol and some ecosystem projects have undergone security audits by various firms, including Runtime Verification and others. In addition, Algorand participates in bug bounty programs. In general, the platform is considered at good levels of legitimacy.

• Is ALGO a Currency?

ALGO token is considered as a currency within the Algorand ecosystem. This is based on its acceptance as a currency with the full features of money in that ecosystem, by virtue of Particular Custom العرف الخاص in Shariah. This means that the custom within that network made ALGO token an acceptable currency that is subject to the rules of currencies in Shariah, the most important of which is spot delivery in case of exchange with another currency.

• Underlying Relationships
  • Relationship between Algorand and users

Users submit their transactions on the Algorand blockchain, where these transactions are implemented, validated, and recorded on the chain according to the network’s protocol, and in return, users pay transaction fees. This relationship is an Ijara إجارة contract between both parties, where a service (processing and validation of transactions) is provided for a pre-determined fee. It is valid from a Shariah standpoint, provided that the application for which the transactions are processed is halal. If the application is haram, the processing and validation Ijara contract will be haram and the use of ALGO for payment will accordingly be Shariah non-compliant.

• • Relationship between Algorand blockchain and validators

Validators stake ALGO tokens to enhance their selection chances for proposing blocks and validating them. In return for these roles, validators earn rewards.

The relationship between Algorand and validators aligns with the Shariah contract of Ja’ala (جعالة), where both the service and fees are pre-determined, and the work is not assigned to a specific validator but distributed based on random selection. This arrangement is permissible from a Shariah perspective, subject to the same condition outlined in the previous section regarding the underlying application’s Shariah compliance.

• • Relationship in delegated staking

As described in section 2, ALGO holders can delegate their tokens to their chosen validator in order to increase the chances of the validator to be selected to do the job. If the validator is honest and performs well, they get a reward that will be shared between them and their delegators. If they act dishonestly, behave abnormally or underperform, there is no slashing penalty, but they both forgo the returns.

We believe that this arrangement is non-permissible as it involves earning of risk-free rewards. It is similar to renting money, which has been forbidden by Shariah scholars.

• Rewards

Solo Staking rewards consist of two components:

1. Block fees, where 50% of transaction fees are paid out as block reward.
2. Algorand Foundation-funded supplementary bonus. This bonus starts at 10 Algo per block and will decay by 1% every millionth block.

Rewards for validators are deemed permissible, as they are based on performance, provided they are validating a Shariah-compliant application, but for delegators and other stakers, rewards are deemed non-permissible.

• Use Cases

The Shariah status of applications for which transactions are processed is important in determining the Shariah compliance of staking, paying gas fees and exchanging ALGO. If a given application is known to be prohibited, then all related validation, fees payment and staking are prohibited.

As outlined in section 3, Algorand has versatile uses, with no dominant application. While there are some Shariah non-compliant use cases such as many DeFi protocols, tokenized financial instruments, some games and many NFTs, there is no evidence that these represent a majority of use cases.

Staking, which was deemed impermissible, represents a non-significant portion of circulating ALGO tokens (circa 19%).

In sum, while there is certainly a haram component that is being built and supported by Algorand, there is no reason to believe that ALGO tokens are likely used in haram uses. Accordingly, we deem that ALGO exchanging is permissible until there is different evidence. This is based on the Shariah rule that the default ruling in things is permissibility الأصل في الأشياء الإباحة and the Shariah rule of likelihood قاعدة الظن الغالب.

Conclusion of Shariah Opinion

The ALGO token on the Algorand platform has been deemed Shariah-compliant based on a comprehensive analysis. This decision considers the Algorand network’s purposes, operational framework and use cases.

The Algorand network is a Layer-1 blockchain that has versatile uses, aiming at achieving speed, security and scalability. The ALGO token serves as the native token of the platform and can be used for paying transaction fees, participating in staking, governance and other activities on the network.

The analysis highlights that the trading of ALGO token must be under spot sale schemes and subject to the rules of currency trading in Shariah.

However, the analysis emphasizes that some use cases of the platform are prohibited such as DeFi, financial instruments tokenization, prohibited games and prohibited NFTs.

The analysis also disapproves of the use of the token in staking (except by validators themselves).

Therefore, token holders should be vigilant not to use the token in participating or supporting such prohibited use cases.