NEAR

1. What is NEAR?

NEAR Protocol is a Proof-of-Stake Layer-1 blockchain for building decentralized applications. Its technology, Nightshade, was designed for faster transactions, lower costs, and higher transaction volume. Nightshade splits the blockchains into smaller sub-chains, to process transactions more efficiently.

NEAR token is the native asset of the NEAR ecosystem. It is a functional utility token which is used as the currency between participants on the NEAR Platform to:

1. Pay the system for processing transactions and storing data.
2. Run a validating node as part of the staking process.
3. Participate in governance processes.
4. Store data.

The goal of introducing NEAR token is to provide a convenient and secure mode of payment and settlement between participants who interact within the ecosystem on the NEAR Platform, and not to be a general medium of exchange accepted by the public as a method of payment for goods or services or debts.

The market capitalization of NEAR is around $7,6 billion and is ranked no. 25.

2. NEAR Consensus Mechanism

NEAR operates based on Proof of Stake (PoS) consensus mechanism.  Validators are required to stake NEAR tokens as a kind of deposit to guarantee their good behavior, with a penalization system that will be mentioned shortly. The threshold for participating in the system is set algorithmically at the lowest level possible to allow for the broadest possible participation of validating nodes in a given “epoch” period (½ of a day).

Validators are chosen based on the “Thresholded Proof of Stake” model which uses an auction to determine how many “seats” will be allocated to each prospective validator (by determining the minimum threshold number of tokens for a single seat).  This auction is designed to provide equal opportunity allocation and allow as many people as possible to participate in the validation process.

A validator contributes to the validation process with an amount of work proportional to their total stake in the network. Accordingly, the reward will be proportional to the percentage of the total amount staked by the validator.

In exchange for servicing the network by producing blocks and chunks and providing security and data availability, validators are rewarded with a number of NEAR every epoch. This number is computed such that, on an annualized basis, it amounts to 4.5% of the total supply of NEAR tokens. Every validator does the same amount of work by executing and validating transactions.

All transaction fees (minus the part which is allocated as the rebate for contracts) paid by users and collected within each epoch are burned by the system. A newly minted number of tokens are paid out by the protocol to validators at the same rate regardless of the absolute number of fees collected or burned. This is to reduce inflation within the system.

Token holders can delegate their tokens to validators. Validators that want to accept delegation can create a special contract and allow users who don’t want to run their own nodes to deposit their NEAR into it. By doing so, funds deposited in that contract are available to the creator of the contract only to use as part of their stake.

Penalties

There are two major types of malicious behavior possible on the NEAR platform:

1. Double Signing: Signing two or more different blocks at the same height.
2. Invalid Chunks: Signing a chunk with an invalid data or computational result.

For double signing, slashing is progressive, i.e., within certain limits it is partial, and above the limits it includes all the staked amounts. For invalid chunks, the full stake gets slashed.

Rewards

Validators as a group are paid fixed 90% of around 5% of total supply annualized (other 10% go to Protocol Treasury). Each validator receives a reward proportional to their participation. After each epoch finishes, the validator will be evaluated based on how many blocks and chunks they produced versus what they were expected to produce.

In the event it’s below 90% of what’s expected, the validator is considered to be offline/unstable, won’t get any rewards, and will be removed from the coming epoch’s validation (i.e., force unstaked). Validators with at least 90% online presence will receive rewards that grow linearly, with 100% of the reward given for those with a 99% or above online presence.

3. Use Cases of NEAR Blockchain

As NEAR is a Layer-1 blockchain, various types of DApps are built upon it. Major types include the following:

• Defi
• NFTs
• Social
• Gaming
• Utilities

Other Dapps include audit, analytics, AI.

4. Use Cases of NEAR token

The following are the major use cases of NEAR token:

• Staking: this encompasses various staking types, including liquidity staking, running own validator and delegated staking. Staking market cap represents 46.8% of circulating market cap[1].
• Transaction fees payment.
• Rewards: Validators and delegators earn rewards from newly minted NEAR tokens.
• Governance: NEAR holders participate in governance, based on their staked amounts.
• Payment method on DApps built on NEAR blockchain.

5. Shariah Screening:

In this section, we will highlight Shariah’s stance on some activities of the NEAR ecosystem and subsequently attempt to draw Shariah’s opinion about the exchange and use of NEAR token. This screening is based on NEAR’s whitepaper and NEAR set of documentation available on https://docs.near.org/ and https://near.org/blog/near-protocol-economics, as well as data published in various sources, such as DeFiLlama.

NEAR is Shariah-compliance will depend on assessing the following elements:

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

• The project

NEAR’s whitepaper states: “It is a complex technology with a simple goal — allow developers and entrepreneurs to easily and sustainably build applications which secure high value assets like money and identity, while making them performant and usable enough for consumers to access” The paper mentions speed and scalability as major cornerstones in the model.

These purposes suggest the presence of real value added through the project. They reflect the prioritization of security, reliability and scalability of handling transactions.

In this capacity, NEAR’s project aligns with Shariah. The network’ purpose emphasis on open conventional finance doesn’t counteract this finding as it is a valid technology for all types of dapps. More discussion on the uses of the network and token will come in the following sections.

• The legitimacy

The whitepaper and set of documentation on NEAR website provide scrupulous details about the network and the underlying processes and mechanisms. The founding team have a good level of expertise and experience in large multinationals. Though still moderate in widespread metrics, the NEAR token is gaining popularity, and ranks no. 25 in terms of market cap. According to Certik Skynet, the platform security score as of date is 90.96, ranking no. 74, with an AA rating. Public audits have been conducted by audit firms on several projects on the platform[2]. The network is hence at good levels of legitimacy.

• Does NEAR token have a value?

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

• Underlying relationships
  • Relationship between NEAR and Users

Users submit their transactions on the NEAR blockchain, where these transactions are implemented, validated, and recorded on the chain. In return, NEAR charges transactions fees for each transaction. This relationship is simply an Ijara إجارة contract between both parties, where a service (processing and validation of transactions) 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 prohibited, the processing and validation Ijara contract will be haram and the payment of NEAR for that will accordingly be Shariah non-compliant.

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

The relationship between NEAR and its validators 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 Islamic law.

• • 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, such relation is valid as per AAOIFI Shariah Standard no. 23.

However, NEAR’s model documentation suggests that slashing affects delegators along with validators. In Shariah agency contract, the result of misconduct or negligence by the agent should normally be borne by the agent. Nevertheless, agreeing on the Principal bearing part or all of it is an opinion of Imam Ahmed Ibn Hanbal and of some Maliki scholars.

• Rewards

Using NEAR tokens can generate several types of rewards:

• Validators rewards are permissible provided the validators do not validate a prohibited transaction, smart contract or DApp.
• Delegated staking rewards are permissible with the same above condition.
• Contract rewards are considered as gifts from the protocol and seem to present no Shariah issue.
• Liquid staking and yield farming rewards are not allowed, as these activities are not allowed as they involve interest (Riba).

• NEAR Token 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. NEAR token use cases involve several activities that are deemed to be Shariah non-compliant. The most important of those are DeFi, NFTs in many cases, gaming that involves gambling and prohibited entertainment. However, there is not enough evidence that prohibited use cases constitute a majority of the uses of NEAR token. For example, data shows that DeFi total locked value (TVL), as of date, represents only 4% of the circulating supply of NEAR token. Unfortunately, We don’t have data on how much of traded tokens is used in supporting prohibited activities. As such, and until there is more evidence, we conclude that the most likely use of a NEAR token is not haram, based on the rule “The default in everything is permissibility” الأصل في الأشياء الإباحة. In this regard, a token holder must pay attention to not using it for supporting a specific prohibited activity or selling it to a specific party that is known to use it mainly in a prohibited activity.

Conclusion of Shariah Opinion:

The NEAR token trading and using has been deemed generally compliant with Shariah principles based on a comprehensive analysis. The token has value and is subject to the rules of currencies in Shariah. However, a token holder must pay attention not to using it for supporting a specific prohibited activity, such as liquid staking or processing a prohibited DApp. Similarly, it is not allowed to sell the token to a specific party that is known to use it mainly for prohibited purposes.

This decision takes into account the token’s structure, its use of smart contracts, and the NEAR platform’s operational framework. The analysis highlights the purpose of the NEAR protocol, its legitimacy, the various relationships on the network, and the reward mechanisms, confirming their general alignment with Shariah standards. The analysis emphasizes that the token should not be used to support prohibited DApps.

This conclusion is subject to regular reviews, especially in relation to the platform’s use cases and applications.

[1] Stakingrewards.com
[2] See https://github.com/NEARBuilders/audits