LINK

1. What is Chainlink and LINK?

Due to the security model of blockchain networks, smart contracts are isolated from the external world and cannot natively connect to off-chain systems. Suppose John decided to buy a company stock if its price decreases below $50. The total amount of money is held in escrow by a smart contract. When the price moves, how does the smart contract know whether to release the funds to buy the stock or not?

The answer is that it requires an “oracle” mechanism to fetch accurate stock market prices off-chain and deliver them to the blockchain. An oracle is an additional piece of infrastructure which relays data from the real world onto blockchain networks.

Founded in 2014, the Chainlink Network addresses this issue by providing a framework for building Decentralized Oracle Networks (DONs). A DON consists of a network of independent oracle node operators that fetch, aggregate, validate, and deliver real-world data on-chain. Each oracle node can specialize in providing different decentralized services on behalf of smart contracts. Decentralized Oracle Networks (DONs) enable the creation of hybrid smart contracts, where on-chain code and off-chain infrastructure are combined to support advanced DApps that react to real-world events.

LINK is an ERC-677 token that is used to incentivize the proper operation of Chainlink DONs, through paying node operator fees and staking. The token has also been bridged across multiple blockchains to enable native Chainlink oracle integrations. Chainlink network ranks no. 15 standing at a market cap of $13.4 bn.

2. Staking on Chainlink 

The staking process aims at distributing the amount of work required among Node Operators, who will effectively produce the oracle reports. The more a node operator stakes, the more likely he is assigned work. Node Operators can increase their stake to get more work by having Community Stakers delegating some of their tokens to them. Node Operators do the computation work to produce oracle reports on their behalf. A portion (currently at 4%) of the attributed rewards earned by Community Stakers is made available to Node Operators as Delegation Rewards in exchange for providing a service on behalf of Community Stakers. 

Stakers have complete control over their staked LINK position. 

Slashing

Slashing penalties are introduced for node operators who fail to meet performance requirements, but community stakers are not at risk of slashing. 

3. Use Cases of Chainlink Network

Before diving into the network’s use cases, we briefly present its products. The network has 3 main products:

• Cross chain communication. This is a secure interoperability protocol for enabling token transfers across blockchains, sending cross chain messages, enabling cross chain real world assets, and connecting private and public blockchains.

• Data

• • Data streams. This is a pull-based oracle solution for high throughput DeFi markets. It makes data available off-chain which anyone can post on-chain to be cryptographically verified. 
  • Market and data feeds. Chainlink data feeds provide a secure reliable and decentralized source of off-chain data to power unique smart contract use cases for DeFi.
  • Proof of reserve. Proof of reserve is an independent verification that enables centralized exchanges to publicly report the value of their reserves and prove their solvency. These reports are typically lengthy and time-consuming. Chainlink Proof of Reserve (PoR) enables decentralized proof of reserves reporting by verifying collateral amounts and posting that data on-chain.

• Compute

• • Functions. This is a serverless developer platform for fetching data from any API and running custom compute. 
  • Automation. This is a smart contract automation solution enabling developers to scale their operations.
  • Verifiably Random Functions (VRF). Provides cryptographically secure randomness for blockchain-based applications.

The Chainlink website presents the products’ major use cases as follows:

• DeFi. This is the most important use case. Actually, the data product is mainly dedicated to this use case, which encompasses Money Market, Decentralized Exchanges (DEX), Stable Coins, Options and Futures, Yield Farming and Insurance. Users use Chainlink’s Price Data Feeds, Automations and, Proof of Reserve for various purposes such as determining the value of user debt and collateral, preventing undercollateralization, determining when liquidations should occur, generating on-chain insurance agreements, etc.
• Financial Services. Chainlink helps financial institutions that are moving operations on-chain in order to increase liquidity and reduce costs via automation. This involves usage of Chainlink’s Cross-Chain Interoperability Protocol (CCIP) which allows sending messages, transferring tokens, and initiating actions across multiple networks, as well as Chainlink Functions, which helps fetch any external data and run custom compute on the network.
• Asset tokenization. Chainlink helps financial institutions and blockchain applications that are tokenizing their assets bring security through reliable data, proof of reserves, and interoperability solutions.
• Insurance. Users can use Chainlink to build blockchain-based insurance products across an array of use cases such as crop insurance, flood insurance, flight insurance and collateral insurance.
• Climate Markets. The network connects carbon markets and helps bring transparency to the measuring and tracking of climate commitments.
• Gaming. This includes using VRF to ensure unbiased results or distribution of NFTs.
• NFT Collectibles. This involves creating dynamic NFTs that automatically update according to real world data and event inputs related to a brand or project.
• Enterprises. Connect existing systems to any private or public blockchain network.

4. Use Cases of LINK

The LINK token is used within the Chainlink Network for the following: 

• Node Operators Fees: smart contracts are required to pay Chainlink nodes using LINK tokens to obtain access to oracle services. 
• Staking
• Rewarding

5. Shariah Screening

In this section, we will highlight Shariah’s stance on some aspects of the Chainlink ecosystem and subsequently attempt to draw Shariah’s opinion about the exchange and use of Chainlink token LINK. This screening is based on Chainlink’s website, whitepaper and blog.

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

• The project: purposes of Chainlink
• The legitimacy
• Does LINK token have value?
• Relationships between Chainlink partners
• LINK Use cases

5.1. The project 

Chainlink promotes itself as “the standard for on-chain finance”. Although its products, as mentioned in section 3, can have several legitimate uses, the platform’s main purpose as stated in different sources, is to power financial systems. Although this purpose might align with Shariah in some cases, it conflicts with it in most cases. This is due to the fact that the overwhelming majority of conventional financial activities are Shariah non-compliant. In this capacity, Chainlink’s general project and purpose do not fully align with Shariah. 

5.2. The legitimacy

Chainlink website provides detailed information about the network and the underlying processes and mechanisms. LINK token ranks no. 15 in terms of market cap. According to Certik Skynet, the platform security score as of date is 93.95, ranking no. 12, positioned among the top 10% crypto tokens with an AA rating. As a measure of audit coverage, the Audited Code Percentage amounts to 90.5%. As such, the network is considered at very good levels of legitimacy.

5.3. Does LINK token have a value?

LINK Token is accepted on Chainlink for reward payment and is exchanged with other tokens on crypto exchanges. The token acquires its value from its acceptance as a currency on the Chainlink ecosystem with the full features of currency therein. This relation is based on the force of Particular Custom العرف الخاص in Shariah. This means that the customary acceptance within that particular network made LINK an acceptable currency therein, that is subject to the rules of currencies in Shariah, the most important of which is spot sale when exchanged with another currency.

5.4. Underlying relationships 

5.4.1. Relationship between Chainlink and Users

Users submit their requests on the Chainlink network. In return, Chainlink charges fees for processing. This relationship is an Ijara إجارة contract between the network and the user, where a service is provided in exchange for a pre-determined fee. This is valid from a Shariah standpoint, with the condition that the smart contract for which the request was submitted is permissible. Consequently, if that smart contract is haram, the processing is haram and the relevant Ijara contract is consequently void. The payment of LINK for that purpose will accordingly be Shariah non-compliant. 

5.4.2. Staking Process and Relevant Relationships

5.4.2.1. Relationship between Chainlink Network and Node Operators

The relationship between Chainlink and its Node 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 Node operator but is distributed based on their respective stake. This arrangement is permissible, subject to the same conditions outlined in the previous section regarding the underlying smart contract’s compliance with Shariah.

5.4.2.2. Relationship between Node Operators and Community Stakers

The relationship between Community Stakers and Node Operators Stakers, as described in section 2, is a Paid Wakala (agency) in performing work وكالة بأجر, whereby the work is doing the computational work for producing oracle reports. The Node Operator acts as an agent for the Community Staker in raising alerts, and the agent’s remuneration is an agreed upon percentage of the total Community Staker’s return. As clarified in previous screening reports, Paid Wakala is valid as per AAOIFI Shariah Standard no. 23.

5.4.2.3. Rewards

There are three types of rewards on Chainlink:

1. Node Operators Rewards
Node Operator Stakers can earn an effective annualized reward. This breaks down as a baseline reward rate of 4.5% per year in LINK against their committed stake, along with delegation reward as a portion of Community Staker rewards. The baseline reward mechanism appears not to breach Shariah because more stake leads to higher likelihood of more work implemented by node operators, and, with the presence of slashing, underperformance will cut off the rewards. Thus, in our view, this reward does not resemble Riba.

The delegation reward is the Wakala return mentioned above, which is allowed.

2. Community Stakers Rewards
Community stakers reward has the same concept as the Node Operators’ baseline reward. We thus don’t see a violation of Shariah therein.

3. Alerting Rewards
If there hasn’t been a new oracle report on ETH/USD on Ethereum for over three hours, any staker can raise an alert, with 20 minutes priority given to Node Operators. For raising a valid alert, the alerter will be rewarded 7000 LINK. There is no Shariah concern about this reward mechanism in our view.

5.5. LINK Use Cases

As outlined in sections 3 and 5.1, the network is mainly designed to serve conventional finance where most activities are prohibited. As a result, most of Chainlink use cases are prohibited, including DeFi, financial services, insurance, financial instruments tokenization, gaming in many cases and NFTs collectibles in some cases. This leads to the LINK token being most likely used to support prohibited activities through rewarding and staking. Selling the token is hence not allowed as it is a strong means to supporting prohibited activities. The only exception is if a token holder sells it to a specified party who is known to use it in a halal use case (e.g., a Shariah-compliant smart-contract). This ruling is based on three famous rules in Shariah: the Rule of Cooperation on a prohibited thing التعاون على الإثم, the Rule of Likelihood قاعدة الظن الغالب, and the rule of Blocking Significant Means to Haram قاعدة سد الذرائع.

6. Conclusion of Shariah Opinion

This report has analyzed LINK token based on Chainlink network’s operational framework and its use cases, as well as the token’s uses.

The report deems that the token has value and can be kept as a store of value.

However, we don’t approve of selling the token to the public through crypto exchanges because of the high likelihood of it being used in supporting Shariah non-compliant activities. This stems from the fact that most of the network use cases are conventional finance activities and the token is primarily used in staking and paying rewards to support those activities. Therefore, selling the token to unknown parties is a strong means to powering the prohibited activities. As an exception, the token may be sold only to a party who is known to use it in definitely halal use case

Staking is obviously prohibited because of the same. The rewards, though their mechanism is compliant, are also prohibited for this reason.

This conclusion may be subject to future review, with respect to potential changes in the network’s use cases.