ADA

1.  What is Cardano and ADA?

Founded in 2015, Cardano is a public, permissionless Layer 1 blockchain network that supports decentralized applications (DApps) with a multi-asset ledger and smart contracts.

Ada is the native digital currency of the Cardano ecosystem. It is used primarily on the Cardano network as an exchange of value, along with other uses that are outlined below. Every ada holder also holds a stake in the Cardano network. Ada is also designed to be usable for a variety of applications and services on the Cardano platform. The market capitalization of ADA is currently $37,8 billion and is ranked no. 10. The maximum supply is set at ADA 45 bn and the circulating supply currently stands at ADA 35 bn.

2. Cardano Consensus Mechanism

Cardano uses a Proof-of-Stake mechanism known as Ouroboros, where transactions are verified by splitting the chains into epochs, which are in turn segmented into time slots. For every time slot, a new slot leader is elected and is responsible for adding a block to the chain for their assigned slot.

The protocol uses a probabilistic mechanism to select a leader for each slot, who will create the next block in the chain. The chance of a stake pool node being selected as slot leader increases proportionately to the amount of stake delegated to that node. Each time a stake pool node is selected as a slot leader and successfully creates a block, it receives a reward, which is shared with the pool proportionate to the amount each member has delegated. Stake pool operators can deduct their running costs from the awarded ada, as well as specify a profit margin for providing the service.

Stake pools are run by a reliable operator that could be an individual or a business.

During pool registration, a pool operator can choose to pledge some personal stake to their pool to make the pool more attractive because this increases the general reward of the pool. The pledged amount can be changed on an epoch-by-epoch basis and will be returned when the pool is closed.

Stake Delegation

Ada holders may delegate the stake associated with their ada to a stake pool. It allows ada holders that cannot or do not desire to run a node to participate in the network and be rewarded in proportion to the amount of stake delegated.

Rewards

There are two ways an ada holder can earn rewards: by delegating to a stake pool run by someone else or running their own stake pool. The amount of stake delegated to a given stake pool is the primary way the Ouroboros protocol chooses who should add the next block to the blockchain. The Shariah screening section will elaborate more on the types of rewards.

No Slashing

Cardano currently does not have a slashing policy. Based on the unique reward-sharing scheme, all stakeholders are claimed to be economically incentivized to behave rationally through a Nash equilibrium scheme.

3. Use Cases of Cardano Blockchain

Cardano aims to be the world’s financial operating system by establishing DeFi products similar to Ethereum’s. Currently there are many other use cases of the platform.

Use cases comprise the following:

• This includes fields like education and digital identity management.
• Finance
  • Cardano’s DeFi ecosystem offers decentralized lending platforms, stablecoins, and decentralized exchanges.,
  • Payment methods, enabling fast, low-cost, and secure payments using ada.
• Supply chain
  • Improving transparency and efficiency in agricultural supply chains.
  • Cardano’s blockchain offers a tamper-proof solution to combat counterfeiting.
  • Supply chain management.
• Social programs. Tracking donations and fund distributions immutably, facilitating microfinance solutions.
• Data and Technology
  • Data storage
  • Tokenized assets like real estate, art, and financial instruments.
• Diverse uses
  • Voting systems
  • Health care
  • Music Industry

4. Use Cases of Ada

Major use cases of the Ada token include the following:

• Staking by delegators
• Pledging by pool operators
• Transaction fees payment
• Governance
• Interaction with DApps and smart contracts on the Cardano platform
• Exchange Trading
• DeFi activities within and outside Cardano.

5. Shariah Screening

In this section, we will highlight Shariah’s stance on some activities of the Cardano ecosystem and subsequently attempt to draw Shariah’s opinion about the exchange and use of Cardano token Ada. This screening is based on Cardano’s website and blog, Cardano foundation, Input and Output Hong Kong, as well as information published on various sources such as DeFiLlama and Stakingrewards.com.

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

• The project: purposes of Cardano
• The legitimacy
• Does Ada token have value?
• Processes and Relationship between Cardano partners
• Uses of Ada

• The project

Cardano promotes itself as “a developing platform built to support enterprises and a wide range of use cases, solving challenges across multiple industries.” Cardano offers decentralized innovation with robust security and low energy usage. As is obvious from the use cases mentioned in section 3, the network aims at fulfilling important gaps and offers services that often reflect value added to the economy and the society. In this capacity, Cardano’s general project does not conflict with Shariah.

• The legitimacy

Cardano website provides detailed information about the network and the underlying processes and mechanisms. It also publishes many academic research papers upon which the technology was established. The co-founder was one of the founders of Ethereum. Ada token ranks no. 25 in terms of market cap. According to Certik Skynet, the platform security score as of date is 89.22, ranking no. 121, positioned among the top 10% crypto tokens with an AA rating. A detailed 2023 activity report was issued by the Cardano Foundation in early 2024. The network is hence considered at good levels of legitimacy.

• Does Ada token have a value?

Ada Token derives its value from its acceptance as a currency on the Cardano ecosystem with the full features of currency therein. This relation is based on the force of Particular Urf العرف الخاص in Shariah. This means that the custom within that network made Ada 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. The token having value implies that it can be used for value adding activities and exchanged for other value-based crypto and fiat currencies.

• Underlying relationships
  • Relationship between Cardano and Users

Users submit their transactions on the Cardano blockchain, where these transactions are implemented, validated, and recorded on the chain. In return, Cardano charges gas fees for each transaction. This relationship is an Ijara إجارة contract between the platform and the user, where a service is provided in exchange for a pre-determined transaction fee. This is valid from a Shariah standpoint, with the condition that the application for which the transactions are processed is permissible. Consequently, if the application is haram, the processing and validation is haram and the relevant Ijara contract is consequently void. The payment of Ada for that purpose will accordingly be Shariah non-compliant.

• Staking Process and Relevant Relationships
  • Relationship between Cardano blockchain and Validators

The relationship between Cardano and its validators (stake pool operators) can be qualified as Ja’ala (جعالة), where both the service and the fees are pre-determined. However, the work is not assigned to a specific validator but is distributed based on consensus and performance. This arrangement is permissible, subject to the same conditions outlined in the previous section regarding the underlying application’s compliance with Shariah.

In Cardano, there is “pledging”. When you register a stake pool, you can choose to pledge ada to the pool. It is designed to disincentivize Sybil attacks likely to occur through creating several small pools. This pledge is not subject to loss; however, there is a reward linked to pledging, which will be discussed in the rewards section.

• • Relationship between delegators and Validators

The relationship between delegators and validators, as described in section 2, is a Paid Wakala (agency) in performing work وكالة بأجر, whereby the validator acts as an agent for the token owner in doing validation, and the Agent’s remuneration is an agreed upon percentage of the total token owner’s return. As clarified in previous screening reports, Paid Wakala is valid as per AAOIFI Shariah Standard no. 23.

Nevertheless, this relationship involves a reward given to the delegator proportional to the staked amount, on top of the reward related to the work performed. This makes the staking reward have some aspects of interest, as discussed in section 5.4.3. This similarity to interest causes us to have doubts about the permissibility of this scheme and hence on the validity of the staking process.

• Rewards

Rewards come from two sources:

• Transaction fees
• Monetary expansion (taken from the platform’s reserve and used for rewards and treasury)

There are 3 types of rewards:

• Pledging reward: a reward that the pool owner earns for pledging the amount of adas they declared at pool registration. It increases with the pledged amount, according to a parameter called pledging factor. This type is not associated with blocks produced, i.e., two pools having produced the same number of blocks, but one has pledged more would receive more rewards. If no block is produced, this reward is zero. Although the pledged amount is not a loan, it bears some features of a loan in the sense that the owner cannot use it for some time, it is guaranteed, and it is locked for the benefit of another party (the platform). Thus, we have doubts about the permissibility of this reward, for its similarity with interest.
• Pool operating reward: the pool receives a reward for block production that is proportional to the amount of blocks produced relative to the expected production, the staked amount and the pledged amount. The reward for block production is valid as per the Ja’ala agreement.
• Staking reward: the delegator receives a share of the pool operating reward, based on the agreed margin with the pool operator. However, if two pools have done the same work relative to the same expected work, but one of them has staked more than the other, the one with larger stake will get a larger reward. As in the pledging reward, this reward is doubtful due to its potential similarity to interest.

• Ada Use cases

In order to ensure the Shariah compliance of a token, we have to verify that it doesn’t have a majority of prohibited use cases.

Data shows that staking represents around 60% of circulating supply, constituting a majority. Given the doubts previously noted on the validity of staking on Cardano, we conclude that trading of Ada is doubtful. In addition, Cardano use cases involve several activities that are deemed to be Shariah non-compliant, such as DeFi, tokenization of financial instruments and prohibited entertainment.

Conclusion of Shariah Opinion:

This report has analyzed Ada token based on the token’s structure, its use of smart contracts, and the Cardano platform’s operational framework and the reward mechanisms.

The report deems that exchanging ADA token is included in the concept of Shubha (suspicion). This is due to the similarity of pledge rewards and staking rewards to interest, which casts doubts about the validity of the staking process. The large share of doubtful staking among ada use cases renders the whole trading of Ada suspicious. In addition, some other use cases of the network are most often Shariah non-compliant such as DeFi. We thus don’t recommend exchanging Ada until its ruling becomes clearer. We also don’t recommend using it in delegated staking.

In all cases, using Ada for supporting DApps that are specifically known to be prohibited is not allowed. Nevertheless, it is allowable to employ Ada in a halal use and to sell it to a specified party that is certainly known to use it in a halal way.

This conclusion is subject to regular reviews, especially in relation to the aforementioned suspicious rewards.