1. What is Ripple and XRP?
The Ripple Platform, launched in 2012, is designed to facilitate fast and low-cost international money transfers and currency exchanges. The network uses a unique consensus ledger and employs XRP as its native cryptocurrency to enable these transactions.
The primary goal of the Ripple network is to improve the efficiency of the global payment system by enabling secure, instant, and low-cost international money transfers. It is primarily used by financial institutions and payment providers.
XRP currency serves as a bridge currency in the Ripple network, enabling the transfer of value between different fiat currencies.
2. Ripple Consensus Mechanism
The Ripple consensus mechanism used to approve transactions is the Ripple Protocol Consensus Algorithm (RPCA). We can describe the flow of this mechanism as follows.
In the beginning, each node has an open ledger of current transactions and a last-closed ledger of recently confirmed transactions. Nodes receive and append users’ transaction proposals to their open ledger where they can propose transactions for the next closed ledger. Unique node list (UNL) is a list each node has of the few dozen other nodes that it trusts for consensus, and that is mainly designed to be a defense against malice.
The consensus process is run periodically, where nodes talk to their UNL members to propagate proposed transactions. Then nodes vote on what transactions should be accepted into the next closed ledger, depending on proposals and the current state of the open ledger. If a transaction accrues 80% or more of UNL votes, it will be approved.
Transactions that meet the voting threshold are included in the next last-closed ledger, ensuring all connected nodes agree on the same ledger and preventing forks. After reaching consensus, the open ledger is closed, and all nodes synchronize to the updated last-closed ledger.
3. Types of DApps Built on Ripple
Decentralized applications (DApps) built on the Ripple network primarily focus on financial services and payment solutions such as:
- Payment Solutions: DApps that facilitate instant and low-cost cross-border payments for individuals and businesses, leveraging XRP as a bridge currency.
- Currency Exchange Platforms: DApps that allow users to exchange different fiat currencies or cryptocurrencies.
- Wallet Applications: Digital wallets that support XRP and other currencies on the Ripple network.
- Remittance Services: DApps specifically designed for remittance services.
- Lending and Borrowing Platforms: DApps that facilitate peer-to-peer interest-based lending and borrowing.
- Decentralized Finance (DeFi) Applications utilizing XRP and other assets for transactions.
- Supply Chain Finance: DApps that enhance transparency and efficiency in supply chain transactions, allowing businesses to track payments and shipments in real-time using the Ripple network.
- Tokenization Platforms: DApps that enable the creation and management of digital assets or tokens on the Ripple network.
4. Uses of XRP
Major uses of XRP include the following:
- Bridge currency for cross-border payments and remittances
- Microtransactions
- Bridge currency in DeFi eco-systems
- Medium for transferring tokenized assets by Ripple between parties
- Payment of transaction fees on Ripple.
5. Shariah Screening
To determine the viability of the Ripple network and XRP from the Shariah point of view, we shall examine the following points:
- Ripple purpose
- Legitimacy
- Uses of the platform
- Does XRP have value from the Islamic Shariah perspective?
- Relationship between Ripple participants
5.1. Ripple Purpose
The primary purpose of Ripple is to facilitate fast, low-cost, and secure cross-border payments and to enhance the efficiency of the global financial system as cross-border payments, liquidity provision, financial inclusion, transparency and security, and partnerships with financial institutions.
The above purposes ally with Islamic Shariah objectives, which aims at preserving wealth. This objective requires facilitating money transactions securely and reliably. However, whether this objective is achieved in a halal or haram way will be discussed below.
5.2. The legitimacy
Ripple’s website and documentation provide detailed information about its projects, operations, and status. The whitepaper offers in-depth insights into the network’s technical aspects of its consensus protocol. Additionally, the network and its affiliated products undergo regular third-party audits by reputable cybersecurity firms.
As a result, many major institutions support and collaborate with Ripple such as Santander, Standard Chartered, American Express, MoneyGram and others. These collaborations demonstrate trust in Ripple’s technology and its potential to enhance payment systems
5.3. Does XRP token have value from the Islamic Shariah perspective?
XRP derives its value from its acceptance as a currency on the Ripple ecosystem with the full features of currency therein, which makes it 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.
5.4. Relationship between Ripple partners
In this section, we analyze the following relations:
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- Between Ripple users and the network
- Between the network and validators
- Between validators and delegators
We will first define these three types of participants to the network then we will analyze their relationships with each other.
Ripple Users:
Ripple users are any individual or entity that interacts with the Ripple network, whether as an end user sending and receiving payments, or a gateway facilitating currency exchanges.
Validators:
Validators are nodes that participate in the consensus process by validating transactions and maintaining the integrity of the ledger. They are responsible for reaching an agreement on the state of the ledger and ensuring that only valid transactions are included. They communicate with each other to propose and vote on transactions, ultimately agreeing on a “last-closed ledger.”
The Ripple network allows users to select their trusted validators, which can influence the consensus process.
Delegators:
Delegators are entities or individuals that do not run their own validator nodes but instead delegate their trust to selected validators. Delegators choose which validators to trust based on their reputation and performance.
5.4.1. Relationship between Ripple Users and Ripple Network
Users submit their transactions on the Ripple network, where these transactions are implemented, validated, and recorded on the chain. In return, Ripple charges 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 activity for which the transactions are processed is permissible. If not, the processing and validation is haram and the relevant Ijara contract is consequently void. The payment of XRP for that purpose would accordingly be Shariah non-compliant.
5.4.2. Relationship Between Ripple and Validators
The relationship between Ripple and validators can be considered 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.
5.4.3. Relationship Between Validators and Delegators
Ripple does not have a traditional delegation model where delegators share returns with validators. Instead, all rewards are earned by validators. The relationship between validators and delegators can be described as a Donation contract “عقد تبرع” where the delegators donate their right of doing the work of validation to validators.
Such contract is accepted in Shariah.
Delegators indirectly benefit from the overall health and efficiency of the network. As the network grows and transaction volumes increase, the value of XRP may appreciate, benefiting all holders.
5.5. Rewards & Penalties
Validators are rewarded by getting transaction fees. Each transaction on the Ripple network incurs a small fee, which is paid in XRP. While these fees are generally minimal, they can accumulate over time, especially in a high-volume transaction environment.
On the penalties side, there is no slashing on Ripple. In case the validator behaves maliciously or fails to perform, possible punishments include reputation loss, removal from consensus or network isolation.
The Ripple rewarding and punishing system doesn’t seem to violate Shariah principles.
5.6. Ripple Use Cases
As outlined in section 3, Ripple is used for various types of DApps. Data indicates that the largest use is cross-border payments and remittances, which represent 70% to 80% of Ripple’s overall use. For the analysis, we highlight the process of those transactions, which includes the following steps:
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- Initiation of Payment: The sender initiates a payment in their local currency. The sender’s payment provider (usually a financial institution or a Ripple partner) connects to the Ripple network to process the payment.
- Conversion to Bridge Currency: The sender’s payment provider (usually a financial institution or a Ripple partner) connects to the Ripple network to process the payment. The sender’s local currency (e.g., USD) is converted into XRP at the sender’s side, using a liquidity provider (e.g., a financial institution) that offers XRP liquidity. This can be done in real-time through a market exchange or liquidity pool.
- Transfer of Funds: The XRP is sent across the Ripple network using blockchain technology, the transfer typically takes seconds or a few minutes.
- Conversion to Recipient’s Currency: Upon reaching the destination, the XRP is converted back into the recipient’s local currency via a liquidity provider or an exchange in the recipient’s country.
- Delivery to Recipient: The converted funds are made available to the recipient.
- Final Settlement: The transaction is recorded on the blockchain.
These steps do not show violation of Shariah but there are some considerations to note. Regarding possession of cryptocurrencies (Qabd), some scholars view that the required spot delivery does not occur unless the transaction is recorded on the blockchain[1], because this represents the possession of the cryptocurrency in that environment.
Accordingly, a seller of XRP is not allowed to sell it before possessing such amount of XRP that is recorded on the blockchain and not just in the platform’s accounts or wallets. The time delay between the execution by the trader of the selling/buying of the currency and the recording on the blockchain is forgiven.
The rest of DApps on Ripple, which present 20% to 30% of uses, are currency exchange platforms, wallet applications, lending and borrowing platforms, supply chain finance and tokenization platforms. These applications are considered halal by Shariah except for lending and borrowing, which are based on Riba. As for crypto currency exchange platforms, most of them offer margin trading and leverage, which are also based on Riba. These practices are not allowed as per an International Fiqh Academy Resolution, making building those DApps Shariah non-compliant. In general, any currency exchange should be void of these practices.
Although these prohibited applications should be avoided, they constitute a minor use of the Ripple network; hence, they don’t affect the permissibility of using the network and its token for general purposes.
Conclusion of Shariah Opinion
This report has conducted an extensive analysis of XRP cryptocurrency based on the coin’s structure and uses.
The report approves XRP exchange and use as a currency, based on the opinion of many Shariah scholars that view cryptocurrencies as valid currencies XRP is accordingly considered as a general currency that is subject to all Shariah rules of currencies. The report also approves the use of XRP on the Ripple platform for building, and within, DApps that are halal. Therefore:
- Using XRP for payments, whether direct payments or involving currency exchange, is allowed.
- Using XRP to build or within prohibited DApps or activities such as interest-based lending is not allowed.
- Exchanging XRP with other currencies, whether fiat or crypto, is allowed, but must be implemented with spot possession of the currency by the buyer.
- Selling any amount of XRP must have been possessed before.
- Leverage and margin trading in XRP exchange are prohibited.
This conclusion is subject to regular reviews, especially concerning the platform’s use cases and applications.
[1] Abdul-Bari Mash’al, op. cit.
