Work Breakdown Structure Template, Lecture notes of Project Management

Download Work Breakdown Structure Template and more Lecture notes Project Management in PDF only on Docsity! SHARIAH WHITE PAPER ON ETHER AMANIE ADVISORS & ETHEREUM FOUNDATION Shariah White Paper on Ether Page 2 of 40 Ethereum Foundation The Ethereum Foundation is a non-profit Swiss “Stiftung” (Foundation) registered in Switzerland as “Stiftung Ethereum” (Foundation Ethereum). The Foundation’s mission is to promote and support Ethereum platform and base layer research, development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications and together build a more globally accessible, more free and more trustworthy Internet. Amanie Advisors Amanie Advisors has become a leading global brand in the Islamic Finance industry since 2005 with offices strategically located worldwide in leading and emerging markets such as in Malaysia, Dubai, Kazakhstan, Oman, and Morocco. It is a leading ambassador for Islamic finance and often is the first entity in new markets creating a dialogue with the various government and corporate entities. Amanie was founded by Dr. Mohd Daud Bakar, a prominent international Shariah scholar and Shariah entrepreneur, who has developed an innovative model of providing cutting edge Islamic Finance consultancy services on a truly global basis from its hubs in the Dubai International Financial Centre (DIFC) via Amanie Advisors LLC and Kuala Lumpur via Amanie Advisors Sdn Bhd (together ‘Amanie’); making it the first Shariah Advisory firm established as a global company that was also founded and managed by the Shariah scholar himself, thereby providing first- hand Shariah knowledge and expertise. Amanie is teamed by professionals and subject matter experts from various backgrounds such as Shariah, legal, risk, accounting, finance, investment, IT etc., with a strong position to provide holistic advisory services. Anchoring the firm’s work is the Amanie Shariah Supervisory Board (“SSB”) which provides guidance to the team. The SSB comprises of four globally renowned scholars comprising, Dr. Mohamed Ali Elgari (Saudi Arabia) - Chairman; Dr Mohd Daud Bakar (Malaysia); Dr. Muhammad Amin Ali Qattan (Kuwait); and Dr. Osama Al-Dereai (Qatar). Shariah White Paper on Ether Page 5 of 40 the public. In the attempt to understand further the Islamic finance requirement and opinion in relation to cryptocurrency subject especially on Ether, he reached out to Amanie Advisors. After a series of discussion, the parties agreed to start collaboration and doing research together for the purpose of establishing a guideline and parameter to the Islamic finance market on Ether as a cryptocurrency. Amanie Advisors has had a meeting with the Ethereum Foundation represented by Virgil Griffith, Tju Liang and blockchain advisor, Atif Yaqub in Singapore in July 2018 to discuss among others the scope and objective of research, briefing on the technological aspect of blockchain, Ethereum platform and Ether, and some preliminary Shariah thoughts from Dr. Mohd Daud Bakar who is the Executive Chairman and Member of the Shariah Board of Amanie Advisors, accompanied by Wan Hafizi Halim, a Consultant of Amanie Advisors. Another session of extensive meeting and intensive crash course on blockchain covering mainly Ethereum platform and smart contract technicalities was held in Dubai in September 2018 led by Atif Yaqub. Dr. Mohd Daud Bakar and Wan Hafizi Halim had also attended the Devcon4 event, the largest annual gathering of Ethereum developers in Prague on 30th October to 2nd November 2018 where they authored and presented a session titled “Is Ethereum Compatible With Islamic Finance?”. Dr. Mohd Daud Bakar elaborated briefly some of the key issues and provided insights on the subject, as parts of the findings from this research2. A series of follow up discussions between the parties has taken place since then which has led to the publication of the final outcome in the form of the Shariah white paper. The paper is structured in two major parts: Part A which covers the technical overview on the subject of cryptography, blockchain, Ethereum platform, Ether and smart contracts, amongst others; and Part B is dedicated for the Shariah analysis based on the research and findings from the technical overview in the earlier Part A. 2 The presentation is now accessible in Youtube – Link: https://www.youtube.com/watch?v=RElU07fmecI Shariah White Paper on Ether Page 6 of 40 OBJECTIVE STATEMENT The main objective of the paper is to outline the Shariah parameters of Ether, the cryptocurrency of Ethereum platform based on the extensive research on the subject from the perspective of Shariah and Islamic finance industry. As with other cryptocurrencies, there are uncertainties especially from the Islamic community whether it is permissible for them to get involved in the space either in the mining or trading aspect of Ether or in the development of smart contract and decentralized applications. The hypothesis prior to the research was that if Ether as the native cryptocurrency of the platform is deemed permissible or in a more friendly terminology in the Islamic finance community – “Shariah-compliant”, then the public shall be more confident and assured to be more active in participating in the development of Shariah compliant smart contracts and decentralized applications which is now still lagging behind. It is hoped that with the findings, parameters and guideline outlined in this paper, it would serve as a catalyst to the Islamic finance market, and wider Muslim population to enter and participate in the space as well. As described earlier, the paper is structured in two parts, namely Part A – Technical Overview; and Part B – Shariah Analysis. Part A – Technical Overview - Although the initial research was to focus on Ether as the cryptocurrency, it is only logical to also discuss other pertinent topics which provide the underlying foundation to the birth of cryptocurrencies which are cryptography, blockchain, and the Ethereum platform without which Ether would be a meaningless token. The paper will also discuss the product of the platform which is decentralized application and smart contract to complete the technical overview part. It is worth to highlight that the paper shall not attempt to go into the very detail discussion on each topic, as this is not meant to be an advanced technical manual and guideline for the blockchain experts, but at the same time it will not scratch only the surface because the intention is to cover at the very least the key salient features which is relevant for the understanding to the Islamic finance community and for the purpose of Shariah elaboration and deliberation. The order of topics and sub-topics sometimes follow the questions that were raised by Amanie Advisors during the research stage and later on answered by the Ethereum Foundation. A letter from Virgil Griffith to clarify some basic questions that were highlighted during the early engagement is attached herein as Appendix. Part B – Shariah Analysis – This part will cover the discussion and analysis of the technology covered in Part A especially Ether as the main subject of the research, from the Shariah perspective. The paper shall start discussing the concept of money in Islam and some pertinent rules related to money, followed suit by the discussion on whether or not Ether fits the criteria to be considered as currency. The subsequent topic shall discuss whether Ether is Shariah White Paper on Ether Page 7 of 40 a Shariah-compliant asset in Islam by looking at the definition and concept of wealth from Shariah perspective. The next topic will provide brief guidelines of Shariah compliant smart contracts and decentralized applications. The Shariah analysis will also discuss briefly on the mining aspect of the platform, whether the concept of Proof-of-Work protocol and the upcoming Proof-of-Stake are in line with the Shariah principle. As a general guideline, in Part B – Shariah Analysis, the paper will maintain some Arabic terminologies which are commonly used in the Islamic finance space such as riba, ribawi, gharar, zakat, etc. in italic forms, but a brief definition and description will be provided where required. Shariah White Paper on Ether Page 10 of 40 The Ethereum documents summarize the definition of blockchain as follow: “A blockchain is a distributed computing architecture where every network node executes and records the same transactions, which are grouped into blocks. Only one block can be added at a time, and every block contains a mathematical proof that verifies that it follows in sequence from the previous block. In this way, the blockchain’s “distributed database” is kept in consensus across the whole network.”8 The basic concept of a transaction happening on a publicly distributed and decentralized blockchain is illustrated over here:- Image Source: Blockgeeks9 III. ETHEREUM The Ethereum is described in the Ethereum Homestead documentation as follow:- “Ethereum is an open blockchain platform that lets anyone build and use decentralized applications that run on blockchain technology. Like Bitcoin, no one controls or owns Ethereum – it is an open-source project built by many people around the world. But unlike the Bitcoin protocol, Ethereum was designed to be adaptable and flexible.”10 8 Ethdocs, What is Ethereum – Link: http://ethdocs.org/en/latest/introduction/what-is-ethereum.html 9 Blockgeeks, What is Blockchain Technology – Link: https://blockgeeks.com/guides/what-is-blockchain- technology/ 10 Ethdocs, Ibid. Shariah White Paper on Ether Page 11 of 40 Ethereum is an “open-source”11, public, blockchain based distributed computing platform and operating system featuring smart contract functionality. The purpose of the Ethereum platform is to serve as a base layer upon which people can build a variety of decentralized or sometimes referred to as distributed applications12, and smart contracts, so as to enable the full potential of blockchain based applications. More information about smart contract will be described later. Ethereum envisages of becoming the “universal computer” which does not belong to anyone but can be used by everyone. Ethereum was created by Vitalik Buterin, a programmer from Toronto. He published a white paper in 2013 describing an alternative platform designed for any type of decentralized application developers would want to build13. His idea received many interests and tractions among the public. Dr Gavin Wood, Co-Founder of Ethereum wrote the Ethereum yellow paper to elaborate the technical details and specification of the platform14. To get the project off the ground, he and other founders launched a crowdfunding sale in July 2014 where participants purchased Ether which is the Ethereum tokens in what was described as the first Initial Coin Offering (ICO). Raising more than $18m, it was used mainly to fund the project development and now managed by Ethereum Foundation, a non-profit entity based in Switzerland15. In the conclusion section of the white paper, it reads:- The Ethereum protocol was originally conceived as an upgraded version of a cryptocurrency, providing advanced features such as on-blockchain escrow, withdrawal limits, financial contracts, gambling16 markets and the like via a highly generalized programming language. The Ethereum protocol would not "support" any of the applications directly, but the existence of a Turing-complete programming language means that arbitrary contracts can theoretically be created for any transaction type or application. What is more interesting about Ethereum, however, is that the Ethereum protocol moves far beyond just currency. Protocols around decentralized file storage, decentralized computation and decentralized prediction markets, among dozens of other such concepts, have the potential to substantially increase the 11 The term “open-source” refers to the program whose source code is made available for use or modification as users or other developers see fit. An open-source program is usually developed by public collaboration and it is made freely available. Examples of other popular open-source software are Mozilla’s Firefox web browser, PHP scripting language and Bitcoin. 12 The abbreviation form used in the blockchain community is DApps, but the paper will maintain the standard terminology of decentralized application throughout the document for standardization purpose. 13 See A Next-Generation Smart Contract and Decentralized Application Platform (Ethereum White Paper) - https://github.com/ethereum/wiki/wiki/White-Paper 14 See Ethereum: A Secure Decentralized Generalized Transaction Ledger (Ethereum Yellow Paper) - https://ethereum.github.io/yellowpaper/paper.pdf 15 Coindesk, Who Created Ethereum – Link: https://www.coindesk.com/information/who-created-ethereum/ 16 Disclaimer: “Gambling” is identified in general context as one of the industries which may benefit from the Ethereum technology according to its founder. It does not mean that it is the main objective or purpose of the creation of Ethereum. The paper will provide further elaboration in Part B on the requirements for a Shariah compliant smart contract which must avoid inter alia the gambling element which is prohibited in the Islamic law. Shariah White Paper on Ether Page 12 of 40 efficiency of the computational industry, and provide a massive boost to other peer-to-peer protocols by adding for the first time an economic layer. Finally, there is also a substantial array of applications that have nothing to do with money at all. The concept of an arbitrary state transition function as implemented by the Ethereum protocol provides for a platform with unique potential; rather than being a closed-ended, single- purpose protocol intended for a specific array of applications in data storage, gambling or finance, Ethereum is open-ended by design, and we believe that it is extremely well-suited to serving as a foundational layer for a very large number of both financial and non-financial protocols in the years to come. IV. SMART CONTRACT Ethereum is currently based on the same public distributed blockchain technology used in Bitcoin with minor differences in terms of how the protocol is configured, and adds the capability of executing certain programming codes of Turing-complete language. Because of this additional advanced feature, Ethereum can also be described as a transaction-based state machine. In computer science, a state machine is defined as something capable of reading a series of inputs and transitioning to a new state based on those inputs. When a certain transactions are executed, the machine then transitions into another state17. This feature makes it easy for developers to build variety of self-executing decentralized applications, or smart contracts. Essentially, a smart contract consists of a set of mechanistic triggerable operations in the form of “IF-THEN” statements. The IF statements can be any other event on the platform, and the THEN operation can be of certain specific actions which have already been setup and programmed into the code such as transferring Ether, or transferring ownership of digital assets, etc. Effectively, smart contracts can function as digital versions of traditional contracts set between any parties, but without the need to have independent third party verification. The verification and validation tasks are handled instead by the Ethereum platform itself. Such mechanics works in the “trustless” environment, hence the reason it is popularly dubbed as smart contract, a contract which has the self-executing and self-validating ability. Smart contracts have the ability to be programmed to run various scripts and are open to be coded the way user would like to deploy set of functions. In summary, a smart contract offers the following features:- 17 Cointelegraph, What is Ethereum – Link: https://cointelegraph.com/ethereum-for-beginners/what-is- ethereum/ Shariah White Paper on Ether Page 15 of 40 Image Source: Cointelegraph21 A vending machine is an automated machine designed to perform specific task, without a third party interference and validation. A customer simply puts the correct amount of money and select item(s) he wishes to purchase and the vending machine will perform the task automatically. In smart contract application, Ether is required as a token to perform a specific task of that particular transaction. ERC20 in the illustration above is the token concept which represents the smart contract application. More information on ERC20 will be described later. Therefore in summary, Ether is used mainly for the following purposes:- • From the perspective of user – Ether is used as the transaction fee to compensate the miners to perform the requested transaction e.g. to activate a certain function in decentralized application or simply to send N number of Ether to another party (which is also a transaction happening on the blockchain). • From the perspective of miner – Ether is essential as the reward token to incentivise the miners to keep supporting and performing the task e.g. validating and relaying the transaction on the blockchain. 21 Cointelegraph, ERC20 Tokens Explained – Link: https://cointelegraph.com/explained/erc-20-tokens- explained Shariah White Paper on Ether Page 16 of 40 Issuance of Ether There are over 100 million Ethers in free circulation to date. At the time of writing the paper, new blocks created and added to the blockchain (or simply called “mined”) will be rewarded with 2 ETH, and the process will take approximately 14 seconds. The issuance of Ether is therefore done automatically by the platform. There is no single authority who “decides” the creation of Ether, nor can any one individual manipulate the network to generate more Ether. There is no maximum cap of Ether, however the issuance protocol is designed based on deflationary concept as to avoid the speculation and price manipulation of Ether. Deflationary in this context means that the number of Ether created per block mined on the blockchain will gradually decrease as the network grows. Valuation of Ether As noted above, the Ethereum platform automatically creates new Ether according to the rate of issuance at a particular time. Because the rate of such creation is fixed based on publicly known rules, and because no individual can control or change such rate, no one controls the rate of generation of new Ether. This is as opposed to fiat currencies where the government or central bank controls the money supply and interest rates, therefore indirectly controlling the price of such fiat currency. As a result, the price of Ether is determined solely by supply and demand in the market. Legal Status of Ether The US Securities Commission (SEC) recently set out their analysis of how to determine if a cryptocurrency is a security, and their determination that Ether token does not fall into the category of a security. William Hinman, Director, Division of Corporation Finance said during the Yahoo Finance All Markets Summit: Crypto:- “… And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”22 This is in fact in line with the nature of Ether which functions only within the specific scopes as described earlier on the Ethereum network. 22 William Hinman, Digital Asset Transactions: When Howey Met Gary (Plastic) – Link: https://www.sec.gov/news/speech/speech-hinman-061418 Shariah White Paper on Ether Page 17 of 40 VI. ETHEREUM TOKENS As discussed earlier, smart contract consists of a set of mechanistic trigger-able operations in the form of IF-THEN statements. Each smart contract is usually represented by a particular token (although this is not always the case because there are smart contracts which do not issue separate tokens) containing the necessary information and instructions as defined by the contract creator. A token is simply a unit of value and a simple representation of a particular smart contract application. It has to be noted that Ethereum tokens are not the same as Ether. While Ether is the main cryptocurrency of the Ethereum platform and has its specific utilities and functions as described earlier, Ethereum tokens are created at the discretion of the smart contract or the decentralized application developers. Thus, Ethereum tokens may serve different functions and purposes according to specified intended objectives. There are in general three types of Ethereum tokens which are commonly used in the blockchain, namely equity token, security token and utility token23. • Equity token – Also sometimes referred to as asset token, equity token represents ownership of an asset. Such token can be used to replace the concept of company stock where shareholders of a company will hold equity tokens instead of the standard paper contract. Stock trading can be made more accessible to average investor and the corporate governance process can be conducted in a more transparent way using blockchain. • Security token – According to the US Securities Commission (SEC), a token is classified as a security token if it represents an investment contract. A transaction will be deemed as investment contract if it fulfils the following criteria24:- o It is an investment of money; o The investment is in a common enterprise25; and o There is an expectation of profit from the work of the promoters or a third party. A token which meets all the above criteria will be deemed as security token and therefore is subject to all securities laws and regulations. • Utility token – As the name suggests, utility token refers to a token which serves one or several utilities as defined by the token creator. It usually provides the token holders access to a product or service. The majority of tokens issued today on the Ethereum blockchain fall under the category of utility token. 23 Strategic Coin, 3 Types of ICO Token – Link: https://strategiccoin.com/3-types-ico-tokens/ 24 Blockgeeks, Security Token – Link: https://blockgeeks.com/guides/security-tokens/ 25 Common enterprise is defined as a horizontal enterprise where the investors pool in their money and assets to invest in a project. Shariah White Paper on Ether Page 20 of 40 VII. EXAMPLE OF DECENTRALIZED APPLICATIONS AND TOKENS At the time of writing the paper, there are around 120,000 smart contracts based on ERC20 token28 and around 200 based on ERC72129. Due to the nature of Ethereum as a fully decentralized public blockchain, anyone can build and deploy smart contract on the platform. There is no centralized platform of repository which tracks or stores all of the information about every decentralized application or smart contract on the blockchain. There are however several independent websites which provide the list of popular decentralized application such as DAppRadar30 and State of the DApps31. For the purpose of this paper and better understanding of how a smart contract works, we will briefly take a look at several smart contracts and tokens as sample case studies. a. Bancor32 Bancor is a blockchain protocol that allows users to convert between different ERC20 tokens directly as opposed to exchanging them on cryptocurrency markets. The project aims to solve the illiquidity as one of the major problems currently faced by the majority of cryptocurrencies including ERC20 tokens. Bancor’s protocol uses smart contract to create Smart Tokens by using its own ERC20 token called Bancor Network Token (BNT). The Smart Token is akin to a central bank holding foreign currency reserves, where in this case it actually holds reserves of all tokens issued based on the ERC20 standard. The Smart Token essentially removes the needs to match the order between buyers and sellers. Instead, the conversion can occur directly through smart contracts on the network. b. Binance33 Binance is the biggest cryptocurrency exchange in the world. Binance launched its own ERC20 token called Binance Coin (BNB) in July 2017 as a utility token. BNB allows the token holder to enjoy discounts on the trading fees when trading cryptocurrency on the exchange. Although BNB is primarily a utility token, it is also being traded in the open market and therefore has its own value. 28 Etherscan, Token Tracker – Link: https://etherscan.io/tokens (Last accessed: 2/10/2018) 29 Etherscan, ERC-721 (NFT) Token Tracker – Link: https://etherscan.io/tokens-nft (Last accessed: 2/10/2018) 30 DappRadar – Link: https://dappradar.com/ 31 State of the Dapps – Link: https://www.stateofthedapps.com/ 32 Bancor – Link: https://www.bancor.network/ 33 Binance – Link: https://www.binance.com/en Shariah White Paper on Ether Page 21 of 40 c. tZERO34 tZERO is one of the portfolio companies of Overstock, an American online retailer. tZERO launched an ICO in December 2017 to fund the development of a licensed security token trading platform. The platform is envisaged to make securities lending activities of the users compliant, more transparent and more efficient from both cost and operational perspective. The tZERO token was issued in accordance with US SEC regulations because of its nature as a security token. It was announced that each tZERO token holder will be entitled to receive quarterly dividend from the profit generated by the company. The ICO has managed to raise $134 million from the investors35. d. Hellogold Token and GOLDX36 Hellogold Foundation is an entity established and registered in Singapore. As part of the foundation objectives to support blockchain technology, it tokenizes the physical allocated gold received as an endowment from Hellogold Sdn Bhd, which is an online gold retailer based in Malaysia. The gold-backed token is called GOLDX, where each GOLDX represents 1g of physical allocated gold safely vaulted by the foundation. The foundation has issued another ERC20 token called Hellogold Token (HGT). HGT is a utility token which provides the holder discounts and benefits to products and services offered by Hellogold Sdn Bhd. The HGT holder may also receive the reward in the form GOLDX at the discretion of the foundation. e. Cryptokitties37 Cryptokitties is a blockchain based virtual game developed by Axiom Zen that allows players to purchase, collect, breed and sell various types of virtual cats. It represents one of the earliest attempts to deploy blockchain technology for recreational and leisurely purposes. Cryptokitties is one of the popular examples of smart contract based on ERC721 token which means that each token is unique and generally serves as a collectible item. Each Cryptokitty in the game essentially is an ERC721 token built on the Ethereum blockchain. 34 tZero – Link: https://www.tzero.com/ 35 Sarah Hansen, Overstock Blockchain Subsidiary tZero Raises $134 Million in ICO – Link: https://www.forbes.com/sites/sarahhansen/2018/08/09/overstock-blockchain-subsidiary-tzero-raises-134- million-in-ico/ 36 Hellogold – Link: https://hellogold.org/ 37 CryptoKitties – Link: https://www.cryptokitties.co/ Shariah White Paper on Ether Page 22 of 40 PART B – SHARIAH ANALYSIS I. STATUS OF ETHER FROM SHARIAH PERSPECTIVE This section will primarily analyse the status of Ether from Shariah perspective. The terminology “cryptocurrency” is used widely as a generic label to Bitcoin, Ether and thousands of other cryptocurrencies currently available in the market. Although labelled as such, are all cryptocurrencies qualified to be deemed as valid currencies? This section will attempt to discuss the very concept of money in Islam followed by understanding the nature of Ether from the Islamic view, and the Shariah consideration and opinion on the status of Ether. i. Money in Islam Currency or money is a special item in Islam and requires special attention as it is deemed as one of the usurious (ribawi) items. This is described in detail in the following prophetic narration (hadith) reported by Ubadah Ibn al-Samit that the Prophet (peace be upon him) said: “Gold is to be exchanged for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.”38 In another narration reported by Abu Sa’id al-Khudri, the Prophet (peace be upon him) said: “Gold is to be exchanged for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in usury. The receiver and the giver are equally guilty.”39 From the above hadith, it is established that there are specific requirements mentioned by the Prophet when transacting with gold and silver, both of which are the official currency of the society at the time (and other items being the staple foods). An exchange transaction of the same items e.g. gold for gold, needs to be done on equal value and must be completed on the spot. If the exchange is between different items (e.g. gold for silver) but within the same category (i.e. currency), the value can be different but the transaction still needs to be completed on the spot. 38 Imam Muslim, Sahih Muslim - 22/102 39 Imam Muslim, Ibid. – 22/103 Shariah White Paper on Ether Page 25 of 40 This paper will not attempt to analyse the differences between the two opinions, although it has to be highlighted that the views that do not limit money to only gold and silver is the more prevalent and the most supported view in the majority of the Muslim world including the International Islamic Fiqh Academy in Kingdom of Saudi Arabia and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is based in Bahrain. Although the Islamic scholars might have disagreement on whether money must or must not be limited to gold and silver, they generally agree on the common attribute of money which is the medium of exchange and measure of value (thamaniyyah). It has been well accepted by the people across history that gold and silver in their natural state possess value that follows their physical form, regardless of whatever happens to the world. When money was printed in the past based on gold and silver (including during the times of early Islamic history which used gold and silver pieces of the Roman empire until they were converted in the early years of the Umayyah empire to dinar and dirham), such types of money were assumed to have always had the intrinsic value. However, from the Shariah discussion regarding the fiqh of currency whether in the past or contemporary, there is no specific mention of the requirements of a specific currency that abides with the Shariah law to be backed by gold or other assets. Other types of commodities beyond gold and silver can also be accepted as money when a society starts adopting them as medium of exchange e.g. shells, grains, etc. This includes the fiat money as we know it today which derives the thamaniyyah value from the government which issues the money. This is known in the modern context as the legal tender, which assigns value to a particular currency even though it is not backed by any type of commodity. It is accepted and acknowledged by a community at large, or a country as a currency. Shariah recognizes the assessment based on ‘uruf or ‘adah which means the current practice and acceptance of the people, as long as they do not contradict any well-established principles of the Shariah. ‘Uruf and ‘adah are tools and techniques used by the Scholars to form a fiqh jurisdiction in Islam. Based on these concepts, a certain subject matter or commodity can be accepted as currency when its usage becomes dominant in affairs and dealings of the people or society at large scale. When this occurs, Shariah shall recognize the subject matter or commodity as a currency and thus shall be subjected to the standard rulings of currency trading (bay’ al-sarf), rulings of zakat, riba, etc. In the same vein, when a particular item or commodity which is used to be a currency, but for some reasons has ceased to become a medium of exchange by the general public, it will then no longer be deemed as a currency and therefore not subjected to the Shariah rulings of currency. Shariah White Paper on Ether Page 26 of 40 iv. Ether – Currency or Commodity? The paper has earlier discussed in detail the subject of blockchain, Ethereum platform and Ether, amongst others. By analysing Ether’s core function and the initial objective of its creation, Ether can be described as a utility token. It is created with specific utilities as follow:- • From the perspective of user – Ether is used as the transaction fee to compensate the miners to perform the requested transaction e.g. to activate a certain function in decentralized application or simply to send N number of Ether to another party (which is also a transaction happening on the blockchain). • From the perspective of miner – Ether is essential as the reward token to incentivise the miners to keep supporting and performing the task e.g. validating and relaying the transaction on the blockchain. Unlike Bitcoin which does not have a particular function apart from being the token of the Bitcoin blockchain, Ether is the utility token needed to ensure the Ethereum platform is working properly and sustainable. A good analogy for Ether and Ethereum is like a theme park which necessitates the usage of a specific token to enter into any games or attraction rides within that theme park. The usage of the token is limited only within the theme park ecosystem. Ether is similar in the sense that it is meant to be used within the Ethereum platform to perform a specific task. Beyond the platform ecosystem, Ether does not have any real-world application or function. Ether is therefore a commodity which has certain value in the context of Ethereum ecosystem. It was not created to become a currency and thus far does not qualify to be deemed as a valid currency based on the discussions earlier especially in relation to the functions of money from the Islamic perspective. It has to be noted in this paper that due to the decentralization nature of Ether, like many other cryptocurrencies as well e.g. Bitcoin, the value of Ether depends solely on the supply and demand of the public. Because of this aspect, as the network and platform grow, a minority segment of the public has started to perceive Ether as an alternative tool for the store of value and a replacement for cash. The utilization for this aspect is however very limited and not widely adopted yet. Although it is something that was never intended and not in line with its original purpose, it can be argued that Shariah does not limit nor restrict the practice of barter trading for example between a commodity against another commodity. Similar analogies can be drawn upon such scenarios; bonus or reward points for credit card utilizations, travel points offered by airline companies, reloadable access card for public transportation e.g. train, which offers e-wallet feature to store a certain amount of value. Shariah White Paper on Ether Page 27 of 40 These practical examples share common feature among themselves namely being valuable asset and can be used as medium of exchange in a specific ecosystem e.g. reloadable access card for public transportation can only be used for the transportation service and nothing else - but they are not deemed as valid currency in the same class with other real money. No retailers accept these “medium of exchanges” for other types of products or services beyond its intended ecosystem and platform. Based on our analysis and review of the concept and function of money in Islam earlier, as the practice of using Ether as a medium of exchange has not been recognized nor adopted widely by the public thus far, Ether cannot be deemed as a valid currency from the Shariah perspective and therefore would not qualify as one of the ribawi items. In technical terms, Ether can serve as a medium of exchange but not amounting to money or currency. It has to be pointed out that the status may change in the future depending on the general public acceptance as discussed earlier. Therefore, there must be continuous research and engagement with Shariah scholars from time to time to constantly evaluate the position and have relevant updated Shariah rulings on the subject based on the latest development in the market. v. Ether as a Shariah-compliant Asset Ether, and cryptocurrencies in general are new inventions which are the results of advanced technological breakthrough of our times. It therefore requires the judgment and interpretation of the current Scholars to ascertain its Shariah-compliance status. According to Muslim jurists, the originality in Islamic law of transactions is permissible unless there is a clear-cut prohibition. It means that when a new transaction or subject matter arises which is not known previously in Islamic law, such transaction or subject matter is deemed permissible unless there is an implication from the sources of Shariah which prohibits it whether explicitly or implicitly. This principle is in accordance with a maxim which provides that “permissibility is the original state of things”, which is discussed under istishab (presumption of continuity) matters in Islamic jurisprudence. It can be understood from this principle that any new invention such as Ether and to a larger extent Ethereum network; is by default acceptable and permissible, unless there is clear element of prohibition based on the general guideline of the Islamic law. There are several major prohibitions according to the Islamic law such as: a. Prohibition of Riba The Arabic word of riba means “to grow; to increase; to grow up, to exceed, be more than..”. In specific meaning, riba is generally translated into English as “usury” or Shariah White Paper on Ether Page 30 of 40 II. SHARIAH OPINION ON ETHEREUM NETWORK AND SMART CONTRACT i. Ethereum Network Ethereum is basically a decentralized platform or a network. In simple analogy, it is like a “computer” which allows the public as the users to develop their own applications or software using the protocol and programming codes set by the platform. Therefore, Ethereum itself is a technology which is lawful from Shariah perspective. This is based on the same principle as described earlier, where everything is deemed permissible unless there is a prohibition mentioned in the sources of Shariah whether explicitly or implicitly. Shariah is therefore neutral in regards to Ethereum which functions merely as a platform. Shariah however will look at how the platform is used and for what purpose; hence this is dependent upon the type of applications or smart contracts being built upon the platform. ii. Decentralized Application & Smart Contract Smart contract is basically a new version of contract which adopts the technology available in our time. Contract in general is an essential part of the economic system of a society; hence Islamic law gives special protection and guidelines to contracts. The right to make and carry out contracts is fundamental to liberty and is protected by the Shariah. “O you who believe! Perform your contracts.” (Al-Maidah – 5:1) The Shariah provides wide scopes to the subject-matter of contract, as well as the ultimate purpose of a certain contract. Islamic contracts may create, transfer, extinguish or release all kinds of rights and perform a variety of actions and transactions provided that they are in line with the Shariah principles. With the advent of blockchain technology nowadays, the potential of Ethereum network to develop smart contract and applications is endless. The technology is powerful that allows wide-ranging smart contracts to be built on the Ethereum platform. For a smart contract to be considered Shariah-compliant, it needs to adhere to specific Shariah requirements which shall cover every aspect of smart contract including its purpose and its underlying assets or its terms and conditions. The paper will describe some of basic Shariah requirements that need to be observed. The purpose and objective of a smart contract creation needs to first and foremost comply with the Shariah requirements. This is similar with the screening analysis of a Shariah Shariah White Paper on Ether Page 31 of 40 compliant business in the Islamic stock market where the core activity of a company must not be contradictory with the Islamic law, principles and rulings. The following areas or sectors are prohibited in Islam, which means that a decentralized application or a smart contract including Ethereum tokens issuance must not be involved in any of prohibited activities in Islam such as gambling, alcohol, non-halal food, adult entertainment, conventional financial products and offerings, etc. The list of sectors is non-exhaustive. And similar with other cases, there can indeed be some exceptions depending on a number of different considerations. It is important to analyse each smart contract or application on a case to case basis because different permutations may exist and the prospect of real-case applications using smart contract is enormous. Apart from ensuring the purpose of the smart contract is in general in line with the Shariah principles and not involved in any of the prohibited activities as previously described, it is also a requirement for the nature and condition of the smart contract to be free from any prohibited element especially the major prohibitions of riba, gharar and maysir. In the earlier section the paper has elaborated briefly description of each of the prohibitions in relation to the status of Ether. Similarly for a smart contract, it also needs to ensure that it is not involved in any of these elements including other prohibitions as well:- a. Prohibitions of riba A smart contract must not be associated with any usurious transaction, which may arise from either dealing with ribawi items as the subject matter of transaction (riba an-nasi’ah), or any increase or decrease in value on top of the original exchange between the parties (riba al- fadl). For example a smart contract with the issuance of security tokens must be structured properly to avoid any occurrence of riba which may exist in the form of guaranteed or fixed return for the original investment. Any investment either in the form of partnership venture (mudarabah) or agency investment (wakalah) shall not guarantee either a fixed return to the investors or capital protection of the investors’ initial investment. b. Prohibitions of gharar Although it was mentioned that Ether by itself is free from gharar, this does not mean that a smart contract is also by default free from gharar. One of the features required in an Islamic contract is that it needs to have full transparency and full disclosure. With the nature of public blokchain which is transparent, the element of gharar pertaining to the subject matter of contract would not be present because the full contract and the actual programming code of Shariah White Paper on Ether Page 32 of 40 the smart contract must be disclosed and can be verified on the blockchain. However gharar may exist in the nature of the transaction itself, for example a smart “sale” contract is initiated to execute a transaction with uncertain outcomes. Another example is when the transaction of sale involves dealing in a subject matter which is not present or not in existence at the time of transaction. These aspects will ultimately render the transaction non permissible and thus making the smart contract not Shariah compliant by virtue of its underlying terms and conditions and its assets. c. Prohibition of maysir A smart contract which has the element of gambling is also not permissible in Shariah. Gambling in this context refers to an action of risking something of value on uncertain outcomes such as winning money or material goods. Islam does not prohibit a contest in general, where the participants get the equal treatment and similar chance of winning and there is no risk of value in participating it. However it will become a gambling which is prohibited when there is an element of “zero sum games” whereby the participants are winning at the expense of others. If a smart contract is developed to facilitate or provide services for gambling activities, it will not be permissible. Similarly, gambling in the context of speculating and betting against the price or value of a subject such as in the financial derivatives market is also not permissible. d. Prohibition of fraud and deception Fraud and deception have broad definitions. Both are indeed prohibited not only in Islam but also by all religions and modern laws and by all means not acceptable in any society. Blockchain technology has the ability to prevent fraud cases by being transparent and publicly verifiable. However fraud and deception may still exist in smart contract application. For example a smart contract with the issuance of asset backed tokens e.g. token backed by a commodity. The smart contract creator needs to ensure that there has to be specific mechanism to identify and to a certain extent to ensure “tagging” of the asset with the tokens on the blockchain. Without proper identification system and mechanism in place, it may open doors for fraud and cheating practices. The paper has made an attempt to identify some of the important requirements to be adhered for a smart contract and decentralized applications to be considered Shariah compliant. As previously mentioned it is important for the smart contract to be analysed and evaluated from end to end perspective to ensure that it fully complies with all the necessary Shariah requirements. Shariah White Paper on Ether Page 35 of 40 problem that concerns the candidate block, a problem that cannot be solved in other ways than through brute force which means it requires a huge number of attempts52. The concept of the “more you work, the more you get or the higher chance for you to win” is generally in line with the overall Shariah principle. In this regard Quran mentions: “And that there is not for man except that [good] for which he strives.” (An-Najm – 53:39) The purpose of such protocol is also to ensure the network is safe from malicious attack, which is important to maintain the integrity and sustainability of the entire blockchain. This is also in line with one of the verticals of maqasid al-Shariah (higher objectives of the Shariah) in terms of protecting the safety of the wealth from any malpractice and bad doings. ii. Proof-of-Stake Algorithm Proof-of-Stake (PoS) protocol is different from PoW in the sense that it is not dependent on the amount of work by the miners, but rather dependent on the stake that the user has. The algorithm now changes from “the more you work, the higher your chance to win” to “the more your stake, the higher your chance to win”. It is completely a different protocol to validate a transaction in the blockchain. In essence, the purpose remains the same i.e. to achieve distributed consensus in adding a new block, but the process to reach the desired goal is different. PoS protocol has already been implemented by a number of different blockchains in the market with the first one being Peercoin in 2012. There are some variations in the technical details of the PoS protocols used by each blockchain, but the general concept remains the same. Another important feature of PoS system is that there will be no block reward which is the issuance of a new token upon completion of a new block being added to the blockchain. Instead, the only reward to the network is in the form of transaction fees which are paid by the users of the network upon executing a certain contract or transaction. This is why in the PoS the miners are called “forgers” because their role now is merely to validate a transaction53. The salient concepts and key differences between the two protocols of PoW and PoS are summarised briefly in the following illustration: 52 Blockgeeks, Proof of Work vs Proof of Stake – Link: https://blockgeeks.com/guides/proof-of-work-vs-proof- of-stake/ 53 Blockgeeks, Ibid. Shariah White Paper on Ether Page 36 of 40 Image Source: Blockgeeks54 In the Casper protocol proposal, the network will have a pool of validators or forgers which will perform the task of validating the transaction and adding a new block to the blockchain. There is no priority scheme for getting inducted into the validator pool. Anyone can join the process by staking Ether to the pool i.e. depositing a certain amount of Ether as stake to participate in the validation process. The reward for each validator will be determined by the network according to a number of factors such as decreasing the reward if there are too many validators and conversely, increasing the reward if there are too few. This is to ensure the validation process occurs properly without being manipulated by anyone in the pool. The staking of Ether into a pool is akin to the placement of security deposit to participate in the mining activity. The return is generated from the transactions fees paid by the network users. There is usually probabilistic element put in place together with the protocol which means that not everyone in the validator pool will get either fixed or the same amount of reward by the system for validating the transactions. 54 Blockgeeks, Ibid. Shariah White Paper on Ether Page 37 of 40 To date, Ethereum has not implemented the Casper PoS protocol yet. There is no detail on how the actual implementation of the protocol will be as the discussion among the developers is still on going. Therefore the paper shall only attempt to provide general Shariah opinion on the PoS protocol from the conceptual perspective. From the general concept of PoS protocol as explained, the return from the stake is not considered riba because i) Ether is not a currency, hence any return or extra payment cannot be deemed as riba al-fadl; and ii) staking Ether is not in the form of loan or exchange with a fixed return, hence the return generated from the process does not fall into the category of riba nasi’ah. Stake in the context of PoS is more like a share in the business activity of validating the transaction on the blockchain. It is also not accurate to draw a comparison between PoS and gambling activities or betting, because the staking process in PoS protocol is essentially not a zero sum game which is strongly prohibited in Islam. The validators in essence do not have the risk of losing its stake entirely by participating in the process. The stake or deposit by the validators can be perceived as a form of collateral which is locked in the system. In the Casper proposal paper for Ethereum, it is mentioned that the validators will lose its stake or deposit only if they act in some way that violates some set of rules which is referred to in the paper as “slashing condition”55, for example if it creates an “invalid” block or signing off on multiple forks which can negatively impact the network56. This scenario does not fall under the gambling category because it serves as a deterrence to ensure all validators follow the rule of validation in the network properly. This is part of the best practices which is perfectly in line with the Shariah teachings. The guideline outlined in this section is based on the interpretation on the general concept of PoS and current understanding of the intended proposal. It is to be noted that the full and actual implementation of PoS has not taken place nor finalized as yet. Thus, a thorough Shariah review on the protocol will be required in the future to assess its compliance and adherence to the Shariah principles once the new protocol is finalized or fully implemented. 55 Vitalik Buterin, Virgil Griffith, Ibid. 56 Max Thake, What is Proof of Stake? – Link: https://medium.com/nakamo-to/what-is-proof-of-stake-pos- 479a04581f3a   August, 22, 2018    Dear Wan,     Please take a look at the following information in response to your email:     1. Overview of Ethereum   Ethereum is an open­source, public, blockchain­based distributed computing platform and  operating system featuring smart contract functionality (described more below).    2. The purpose of the Ethereum platform   The purpose of the Ethereum platform is to serve as a base layer upon which people can  build a variety of distributed apps (dApps), so as to enable the full potential of  blockchain­based applications. That's really about it­­­we don't know what people are  going to build.  But we recognize the technologies' potential for a more accountable,  less­corrupt, decentralized, world.    3. Smart Contracts   A smart­contract is a program (state­machine) that runs on the Ethereum platform.  A  Smart Contract consists of a set of mechanistic triggerable operations, a set of IF­THEN  statements.  The IF statements can be any other event on the platform, and the THEN  operation can be transferring Ether, or ownership of digital assets. Effectively, smart  contracts can function as digital versions of traditional contracts set between any parties,  but without the need to have 3rd party verifiers, instead depending on the Ethereum  platform itself (the “trustless” mechanic). Smart contracts have the ability to be  programmed to run various scripts and are open to be coded the way user would like to  deploy set of functions.     4. Ether and Gas  Ether (ETH) is the internal currency for the Ethereum platform, and its sole purpose is to  compensate miners for verifying the correctness of the Ethereum ledger and processing  updates to the ledger. This internal currency is a **required** feature of any base­layer  blockchain­based system­­­it is the only way that anyone, without caring who they are,  can be compensated for processing updates.    The compensation amount by operations on the Ethereum platform is priced in units of  “gas”. With each Ethereum transaction, the sender has to specify, "I'll offer N units of ETH  per gas consumed", and if this amount is accepted by the miners, the transaction is  processed. When the price of ETH goes up (or down), people will bid different amounts of  ETH to pay for their gas requirements accordingly. It is also important to note that “gas”  does not exist as a separate internal currency ­ all amounts are only in ETH.      Page 1 of 3      As the platform has grown, we have observed that people have started using ETH as a  store of value and as a replacement for cash.  This was never something we intended, nor  even particularly wanted people to do.  But Ethereum is a permissionless network (i.e.  anyone can participate without needing to get anyone’s permission). As such, if people  want to start treating ETH like cash, we cannot do anything about it.     5. ETH is issued automatically by the platform  There are over 100 million ETH in free circulation to date. Currently new blocks  mined create 3 ETH approximately every 14 seconds. These are created  automatically by the platform ­ there is no one who “decides” on the creation of  ETH, nor can any one individual  manipulate the network to generate more ETH.  Deflation approach limits the supply so protects value. As the network grows block times  slow further reducing the output of ETH.     6. The price of ETH is dependent wholly on the market   As noted above, the Ethereum platform automatically creates new ETH. Because the rate  of such creation is fixed based on publicly­known rules, and because no individual can  control or change such rate, no one controls the rate of generation of new ETH. (This is as  opposed to fiat currencies where the government/central bank controls the money supply  and interest rates, therefore indirectly controlling the price of such fiat currency). As a  result, the price of ETH is determined solely by supply and demand in the market.     7. SEC statement  The US SEC recently set out their analysis of how to determine if a cryptocurrency is a  security, and their determination that ETH is not a security.   https://www.sec.gov/news/speech/speech­hinman­061418  https://www.cnbc.com/2018/06/14/cryptocurrency­ether­soars­9­percent­after­sec­official­ says­its­not­a­security.html    8. Examples of dApps  Links to examples of dApps can be found below:   https://dappradar.com/  https://www.stateofthedapps.com/rankings    So far Ethereum has mostly been for simple games (e.g., CryptoKitties), and basic  financial infrastructure (IDEX/ForkDelta).  There's been a recent spike in Fomo3D as a  transparent gambling application / performance art.  Probably the most interesting apps  (i.e., "What ethereum was intended for") are the ones in the "Other" category, like Augur,  0x, Ethereum Name Service, etc.      Page 2 of 3      Many dApps are being built at the moment on the network but we hope that post shariah  compliance this will encourage the Islamic Finance world to also engage in building  shariah compliant decentralized products on the network. It is also possible to build  shared knowledge resources. The Islamic principle of Isnaad (chain of transmission) can  also be used on the network to secure important documents.    9. Description of ERC20 Tokens  ERC20 tokens are what most dApps and Smart contracts issued on the network use. Not  all require a token. Some may just use ETH as native token. Others mint new tokens.  Anyone can launch a new application with a new ERC20 token. By coding the token and  launching a smart contract they can now give value to their own token, just like HelloGold.  These token operate and transfers through the Ethereum network. The network has no  control on who issues the tokens, how many and what they are used for. The token  transactions are validated through the network and follow the smart contract functions to  stay true to what has been coded. You can view tokens that are issued as smart contracts  here  https://etherscan.io/      10. PoS vs PoW  Currently the Ethereum platform runs on Proof­of­Work (PoW) algorithm. PoW miners are  rewarded to create new blocks with new minted ETH (as described above). There are  proposals to change this to Proof­of­Stake (PoS). In the PoS model you are rewarded to  validate transactions against the amount of ETH you currently hold. So the larger holders  will be validating more transactions for more reward. PoS is suggested to make the  network faster and more scalable to the masses as a much faster and lighter protocol.     I hope the above is helpful. Please let me know if you have any more questions or want  any clarification on any of these points.    Thank you,    Virgil Griffith  Research Scientist, Ethereum Foundation            Page 3 of 3