SEI

1. What is Sei blockchain and SEI token?

Sei is a Layer 1 blockchain, specifically designed to optimize trading of digital assets. It provides developers with the infrastructure needed to build efficient and secure decentralized exchanges. Having a transaction finality of 380ms, Sei is fully open-source and offers native frontrunning protection, and multiple levels of transaction bundling.

SEI is the native token of the Sei blockchain network. SEI tokens can be used to pay network gas fees, participate in governance and to be staked to secure the network. Sei market cap stands at USD 1.3 billion, ranking no. 86 on Coingecko.

2. Sei Consensus Mechanism

Sei consensus operates through a Delegated Proof-of-Stake (DPoS) mechanism. In a DPoS system, token holders secure the network by delegating their tokens to validators. The tokens are locked and contribute to the validator’s stake. Staked SEIs remain, legally and from an accounting perspective, under their holder’s ownership, but it’s a restricted ownership so that they won’t be able to trade or transfer the tokens freely while they are staked. The holder retains control over them in the sense that they can choose to un-delegate them after the staking period or re-delegate them to another validator, but they can’t use them for other transactions until they are unstaked.

Validators produce new blocks and validate transactions. The Sei protocol incentivizes validators and delegators with staking rewards from gas fees and inflation rewards. Staking rewards are calculated based on the total amount of Sei staked and the validator’s performance. Fees and inflation rewards are distributed to validators and their delegators proportionally to their staked amount. Validators typically keep an agreed upon portion of rewards as commission and distribute the rest to delegators.

Slashing

Validators must meet strict standards and constantly monitor and participate in the consensus process. Validators monitor each other and can submit evidence of misbehavior. Slashing is the penalty for misbehaving validators. When a validator gets slashed, they lose a portion of their stake as well as a portion of their delegator’s stake. Slashed validators also get excluded from consensus for a period.

Slashing occurs under the following conditions:

• Double Signing: Signing two different blocks with the same chain ID at the same height.
• Downtime: Being unresponsive or unreachable for a period.
• Missed Votes: Missing votes in consensus.

3. Use Cases of Sei Blockchain

Here are some key use cases of Sei blockchain:

1. Trading Platforms: Sei is built to support high-performance trading applications, including decentralized exchanges (DEXs) and NFT marketplaces. Its infrastructure is optimized for speed and scalability, making it very suitable for trading activities.
2. Gaming: Games that require the exchange of in-game assets can benefit from Sei’s fast and efficient infrastructure. Projects like Axie Infinity and StepN, which involve asset exchanges, can leverage Sei for better performance.
3. DeFi Applications: Sei’s infrastructure supports decentralized finance (DeFi) applications that require high throughput and low latency. This includes lending platforms, derivatives, and other financial instruments.
4. Asset Management: Institutions can use Sei for robust asset management solutions, benefiting from its speed and scalability.
5. Innovative Financial Products: Sei enables the development of complex financial products like derivatives, leveraging its advanced blockchain capabilities.

While Sei is versatile and can support a range of applications, its architecture and features focus on enhancing trading and asset exchange, as these are considered the most fundamental use cases for the platform.

4. Use Cases of SEI token

• Fee Token: Used to pay transaction fees on the Sei network.
• Governance Token: Used to participate in governance decisions affecting the network.
• Staking: Used to delegate to validators or to run holder’s own validator.
• Exchange Fees: Used to pay fees in exchanges that are built on the Sei blockchain.

5. Shariah Screening

In this section, we will highlight Shariah’s stance on some aspects of the Sei blockchain and subsequently draw Shariah’s opinion about the exchange and use of SEI token. This screening is based on the Sei whitepaper and other documentation and information published on Sei website.

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

• The project
• The legitimacy
• Underlying Relationships
• Use cases
• Is SEI a currency?

• The project

As mentioned before, Sei’s main goal is to enhance trading of digital assets, which is said to be “instrumental to unlocking the next stage of growth for Web3 adoption”^[1]. This goal per se does not conflict with the Shariah objectives and adds value to the Web3 world.

• The legitimacy

Sei 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 90.9, ranking no. 84 and positioned among the top 5% crypto tokens with an AA rating. Further, the code security pillar score is 93.8. Therefore, the platform is considered at good levels of legitimacy.

• Underlying relationships
  • Relationship between Sei and Users

Users submit their transactions on the Sei blockchain, where these transactions are implemented, validated, and recorded on the chain according to the network’s protocol, and in return, users pay gas fees. 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 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 SEI for payment will accordingly be Shariah non-compliant.

• • Relationship between Sei blockchain and Validators

Validators’ primary responsibilities include validating transactions, producing blocks, and participating in consensus. In return for these roles, validators earn rewards.

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

• • Relationship between Nominators and Validators

As described in section 2, SEI holders delegate their tokens to their chosen validator in order for the validator to do the validation process on their behalf and to have a greater chance of being elected. If the validator is honest and performs well, they get a reward that will be distributed between them and their delegators. If they act dishonestly, behave abnormally or underperform, they are penalized with deductions from the tokens staked by them and by the delegators.

We believe that this relationship is a Wakala bi Ajr (paid agency) for performing work وكالة بأجر في العمل, whereby the validator acts as an agent for the token owner, and the agent’s reward is an agreed upon percentage of the total token owner’s return, this percentage is set by each validator and vary as they compete for nominators. This is valid as per AAOIFI Shariah Standard no. 23, as outlined in previous screening reports. Determining the remuneration as a portion of revenue is an opinion of Imam Ahmed Ibn Hanbal.

Based on that, we don’t see any clear violation of Shariah rules Shariah in this relationship.

• Rewards

Based on the above, rewards earned by the validators and the delegators do not show any breach of Shariah rules, except in the case where they come from 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 SEI. If a given application is known to be prohibited, then all processing, fees payment and staking are prohibited.

As outlined in section 3, Sei has versatile uses, with the most important one being optimization of digital assets trading and NFT marketplaces. Other uses include DeFi, gaming and financial innovation. We didn’t find quantitative data regarding the relative weight of each use case and the weight of SEI token usage related to each use case. However, despite the existence of many Shariah non-compliant crypto tokens and NFTs, there is no evidence that they represent a majority of all traded tokens so to conclude that trading is Shariah non-compliant. Regarding the other uses, DeFi and financial innovation are mostly haram but there is also no evidence that transactions related to these activities constitute a majority on Sei blockchain. This also applies for games, where the haram component is considerable.

In sum, while there is certainly a haram component that is being built and supported by Sei, there is no reason to believe that the majority of Sei use cases and hence SEI token uses are haram. Accordingly, we deem that SEI exchanging, staking, using in fees and governance 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 SEI a currency?

SEI token is considered as a currency within the Sei blockchain ecosystem based on its acceptance as a currency with the full features of money in that ecosystem. This ruling is based on the force of Particular Custom العرف الخاص in Shariah. This means that the custom within that network made SEI 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.

Conclusion of Shariah Opinion

The SEI token on the Sei platform has been deemed compliant with Shariah principles based on a comprehensive analysis. This decision considers the Sei platform’s purposes, operational framework and use cases. The Sei platform is a Layer-1 blockchain that has versatile uses, with the primary objective of optimizing trading of digital assets. The SEI 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 platform. The analysis highlights the legitimacy of using the SEI token for staking and governance as well as trading it 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 supporting the trade prohibited crypto assets and prohibited NFTs and DeFi apps. Therefore, if a given use case is known to be prohibited, it is impermissible to use the token in supporting it by staking or paying transaction fees.

[1] The Sei Litepaper, https://blog.sei.io/sei-the-fastest-l1-for-trading/.