ICP

1. What is the Internet Computer Protocol and ICP token?

The Internet Computer (IC) is an open blockchain network that can host and run applications directly without the need for traditional IT infrastructure like servers or cloud services. It combines features of cloud computing platforms with blockchain technology, allowing developers to create decentralized applications (dapps) that run at web speed. The IC uses special smart contracts called “canisters” that can store both code and data and perform computations.

The IC is hosted by special node machines, distributed in various geographical locations and dedicated to creating a sovereign network, governed by an advanced DAO^[1], called the Network Nervous System (NNS).

The Internet Computer was launched and open-sourced in May 2021, by the DFINITY Foundation. The Internet Computer is now an independent network controlled by ICP token holders, but DFINITY continues supporting its evolution.

The Internet Computer (IC) makes use of a utility token called ICP. This token is a governance token as well as a medium of exchange to pay for goods and services such as NFTs, subscriptions, etc. As of date, the IC has a market cap of USD 2.8 billion, ranking no. 43.

2. IC Consensus Mechanism

The Internet Computer runs on a network of nodes, which are dedicated hardware with standardized computational specifications, run by organizations called “node providers” rather than by individual validators. To become a node provider, one must go through an onboarding process that includes submitting proposals to the NNS DAO for voting. Voting is conducted by ICP token holders participating in governance. The NNS processes these votes and selects nodes based on the node provider, the data center location, geography, and jurisdiction. A random mechanism, called “beacon mechanism” is then used to select nodes for block making in each round of consensus.

Nodes in the IC perform a consensus mechanism called “Proof of Useful Work” (PoUW). Contrary to Proof-of-Work (PoW) systems where machines compete to solve arbitrary mathematical puzzles, PoUW nodes perform actual useful work. They process transactions and execute smart contract computations that are necessary for the network’s operation. In PoUW, nodes aim to perform the same amount of computation rather than competing to perform more. Nodes that deviate (by producing more or fewer blocks than expected) can be punished. PoUW doesn’t require node providers to stake additional tokens. The investment in hardware and operational costs serves as a form of stake.

3. Use Cases of IC Blockchain

The IC blockchain has a versatile set of uses. These include:

• Decentralized Web3 Applications. The IC provides the infrastructure to host websites, apps, and services without relying on centralized cloud providers like Amazon Web Services (AWS) or Google Cloud.
• The IC enables decentralized exchanges and other DeFi applications to be built entirely on-chain.
• The IC supports advanced DAOs through its Service Nervous System (SNS)[2] framework. DAOs (such as governance structures and community-driven organizations) can be built and managed on the Internet Computer. These organizations can run entirely on-chain, where decisions are made through voting mechanisms using tokens or other governance tools.
• The IC can store all components of NFTs on-chain, including assets. Projects can use the Internet Computer to build decentralized marketplaces and digital galleries.
• The IC enables on-chain gaming experiences.
• Social media. Decentralized social media platforms can be built on the IC.
• AI models. Running AI models entirely on-chain.
• Enterprise solutions. The IC offers an efficient blockchain-based cloud alternative for enterprises, as well as decentralized applications for supply chain and logistics.

4. Use Cases of ICP token

ICP tokens have two primary functions:

• They can be staked in the Network Nervous System (NNS) to create special accounts called “neurons” for governance participation. By staking, holders can vote on proposals and earn rewards that are proportional to the amount and duration of staking as well as the ratio of the proposals they voted on.
• ICP can be used to pay for the usage of resources consumed by the IC. ICP tokens can be converted to “cycles” (i.e., burned), and these cycles are used by developers to pay for the resources that canisters use (storage, CPU, and bandwidth). Since the cycle price is pegged to a basket of fiat currencies, the cost to developers of acquiring fuel to run their application is predictable. This uses a reverse-gas model, which means users don’t need tokens to interact with dapps.

Beyond these two functions, ICP tokens have two other uses:

• Inflation and Rewards: ICP tokens are used to renumerate node providers, via newly minted ICP. The renumeration they receive is fixed per node and tightly related to their actual costs. It depends on two parameters: first, the location of the node, as hosting prices differ between locations; and second, the node hardware and connectivity specifications.
• The IC allows developers to transfer control of their dapps over to a DAO and raise funds. In this process called “decentralization swap”, users can commit some ICP to a new DAO. and receive tokens of the DAO with everyone paying the same price. These funds, retained within the reserves of the DAO, can be used to pay for future computation needs of the DApp.

5. Shariah Screening

In this section, we will highlight Shariah’s stance on some aspects of the Internet Computer blockchain and subsequently draw Shariah’s opinion about the exchange and use of ICP token. This screening is based on the IC documentation published on its website.

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

• The project
• The legitimacy
• Underlying relationships
• Use cases
• Is ICP token a currency?

• The project

The Internet Computer Wiki states: “The Internet Computer is a general-purpose blockchain (…). It is designed to provide a World Computer that can replace traditional IT and host a new generation of Web3 services and applications that run solely from the blockchain, without the need for traditional IT. It can also play the role of Web3 orchestrator, by interacting with traditional blockchains”. This goal per se does not conflict with the Shariah objectives and principles and adds value to the Web3 world.

• The legitimacy

IC website provides detailed information about the protocol and the underlying processes and mechanisms. According to Certik Skynet, the platform security score as of date is 88.2, ranking no. 215, with an AA rating and positioned among the top 5% crypto tokens. Despite a code security score at 80.9 and a governance score at 74.9, the platform is overall considered at acceptable levels of legitimacy.

• Underlying relationships
  • Relationship between IC and Users (Developers)

Users submit their transactions on the IC blockchain, where these transactions are implemented, validated, and recorded on-chain according to the protocol, and in return, users are charged pre-paid gas fees according to the model outlined in section 4. This relationship is an Ijara إجارة contract between both parties, where a service (processing and validation of transactions) is provided in exchange for a pre-determined fee. It is valid from a Shariah standpoint, provided that the dapp 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 ICP token for payment will accordingly be Shariah non-compliant.

• • Relationship between IC and Node Providers

Nodes are pre-selected by the protocol to perform transaction validation and block production and earn rewards in return. The relationship between IC and nodes also falls under the Ijara contract. The same principles outlined in the previous section apply here.

• Rewards

There are two types of rewards:

• Voting rewards: which are paid out to token holders when they stake their tokens in neurons and vote on proposals. They increase with the amount staked and duration of staking as well as the ratio of the proposals they voted on. We disapprove of this type of reward, as it bears a strong resemblance to Riba, in the sense that the staked ICP are inaccessible to their owner during the duration and are guaranteed to them (i.e., no risk), therefore they bear the same characteristics of an interest-based loan.
• Node rewards: which are earned by node providers, do not show any breach of Shariah rules, except in the case where they are generated by the validation of a well identified haram use case.

• 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 ICP token. If a given application is known to be prohibited, then all processing, fees payment and staking are prohibited.

As outlined in section 3, IC has a versatile array of uses, with the most important one being decentralized Web3 applications. Other uses include DeFi, DAOs, gaming and enterprise solutions. We didn’t find quantitative data regarding the relative weight of each use case and the weight of ICP token usage related to each use case. While some of these use cases are haram, there is no evidence to say the majority of use cases are prohibited.

Accordingly, we deem that ICP token exchanging and using in gas fees payment 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.

• Is ICP token a currency?

Since ICP token is considered as a medium of exchange on the IC blockchain, it is a considered as a currency within that ecosystem. This ruling is based on the force of Particular Custom العرف الخاص in Shariah. This implies that it is subject to the rules of currencies in Shariah, the most important of which is spot delivery in case of exchange with another currency.

Conclusion of Shariah Opinion

The ICP token on the Internet Computer platform has been deemed compliant with Shariah principles based on a comprehensive analysis. This decision considers the IC platform’s purposes, operational framework and use cases. The IC is an open blockchain network that can host and run applications directly, without the need for traditional IT infrastructure like servers or cloud services. It combines features of cloud computing platforms with blockchain technology. The ICP token serves as the utility token of the platform and can be used for governance, paying transaction fees and rewards. The analysis highlights the acceptability of trading it under spot sale schemes. However, the report disapproves of the governance rewards due to their strong resemblance to Riba. In addition, the analysis emphasizes that some use cases of the platform are prohibited such as DeFi apps. Therefore, ICP holders should be careful not to use the token in helping a prohibited use case.

[1] A decentralized autonomous organization (DAO) is a form of governance without a central governing body. In a DAO, no member or group of members has authority over one another, and each member shares the goal of acting in the best interest of the organization. DAOs can be used to govern projects, applications, or any other entity in a decentralized manner. Membership in a DAO is determined by holding a certain cryptographic asset or token, such as a system-native token. With token-based membership, members may receive voting rights within the DAO by staking the system token.
[2] The Service Nervous System framework is the Internet Computer’s built-in solution for decentralized autonomous organizations (DAOs) to govern dapps. An SNS consists of an open, permissionless governance system and of a built-in governance token that is unique to each SNS. Launching a new SNS includes raising initial funds for the DAO and decentralizing the DAO’s voting power. Any DApp can be tokenized and decentralized by handing it over to a new SNS DAO.