The push out of web3 to the world and blockchain even bleed more into the global economy and got widely known from every single corner of the world. Web3 as a decentralized system has been the magnetic feature that attracted so many people even with those different beliefs to stay and actively participate in the web3 community.
Not only does web3 bring a decentralized system but also decentralized finance, which has been among the global problems before the existence of web3. Our banking and financing system is governed by a body that has control over global funds. They decide when we can spend or not. Surprisingly, not everybody will know this but even those that know it can't defer from using it because that's the only system.
Every other religious belief other than Islam are most far from using the pioneered conventional finance system because they've got rulings or planned processes to set their financing law through their divine source. But the Islamic jurisdiction has brought along a seamless and more fascinating way of financing which is broadly known as "Islamic finance" which we shall discuss in this article.
Islam believes in general has been a religion that has been perfected by its divine ancestors, it is a religion that fits in any environment and also prompts high stimulation to trends with their divine guidance. So with the emergence of DAO ( decentralized autonomous organization) which is a decentralized finance system does it fits in the Islamic jurisdiction or does Islam accept it? Firstly let's understand DAO as a whole:
DAO is a short form for "Decentralized Autonomous Organization". DAO is an organizational-led entity with no central ownership and central authority. It has no central governing body. It's a decentralized community that is autonomous and transparent which are owned by its members who have the same interest and pursue a common goal using the custom-rooted rules of the decentralized Blockchain technology. Through smart contracts, they transact, outsource funds, make decisions and perform their personalized activities.
DAOs are in smart contracts — Smart Contracts are just simple lines of computer code that automatically run on the blockchain, and they are independent which makes them self-executable when certain conditions are met. Smart contracts are immutable, transparent, save money and time, accurate, and most importantly, they are secure and decentralized.
Understand DAO better
A DAO is brought to raise market capital through trading fiat or some of its native tokens. The token represents the ownership and voting power of any members. When a DAO is brought to life and is eventually launched and successful the value of the token will be increasing and so the DAO can issue its next token at a greater value and with that the organization will be able to raise more capital.
With decentralization, we can now control the entity and the protocol governing us to enhance our security and a personalized system of the internet. Being autonomous with our protocols, shared rules, transaction and treasuries ledgers are encoded and automatically executed on the blockchain network. Joint interest is usually best achieved by groups of people or individuals that come together, associate and coordinate themselves to achieve a specific goal.
Key benefits of DAO:
Decentralization: Decisions made to grow the organization are made by the potential members not figured to work from the central authorities only.
Publicity: In the scope of the DAO community all protocols, votes and decisions are passed through smart contracts with the help of blockchain and are made visible or public to all potential members. So every action taken that will either benefit or befall any member is made public to all voters or members.
Community: To achieve a great and successful DAO, it's important to be carried out by a community of people with the same goal and interest which are from all over the world to build a vision and achieve it together.
With all we've said about DAO, does it violate the rulings of the Islamic finance system or not? Firstly, let's check Islamic finance as a whole:
Islamic Finance :
The Islamic finance system has been rapidly growing the industries using the system with over 3 Trillion dollars in global growth and invested assets. Top world economist has estimated Islamic Finance accounts for $2 trillion a year and is positioned with growth to reach over $3.69 trillion in 2024 according to Gulf Business. Even with the large global population of Muslims, it is even close and expected to increase by 70% with a total increase of 3 billion in 2060. According to Pew Research.
Islamic sensibilities are surely on the growth track to continue attracting capital. What's Islamic finance?
Islamic Finance is said to be the provision of financial services by what the Shari’ah Islamic law, principles and rules have laid down from their divine and reported source. Shari’ah rulings do not permit receiving and paying of "riba" (interest), "gharar" (excessive uncertainty), "may" (gambling) and also short sales or financing activities that it considers harmful to society.
Islamic finance has enhanced the practice that parties must share the risks and rewards that deal with a business transaction and the transaction must have a real economic motive purpose without doubtful speculation and not involve any exploitation of the opposite party. The Islamic finance system is growing through some popular unique modes of transaction Some of these modes include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).
That's a summary of the core meaning and rulings of Islamic finance, why don't we check it with DAO?
Start from here
Compatibility of Islamic Finance with DAO
The root of rulings in Islam is based on their divine source, their religion has stated to them what they shouldn't do or move near which is what has been prohibited them and they call it "Haram". So anything that falls under what is prohibited for them will be abstained from totally because it has contradicted their religious basics.
Now otherwise to what you're thinking, have they been told what must be done or what's lawful for them? No! Everything is lawful except what has been said to be prohibited. And the prophet (peace be upon him) said: "Verily lawful things are clear and also the unlawful ones". This Hadith ( sayings of the prophet inspired by him) shows that everything lawful and unlawful is clear in such a way that they're mentioned to us.
The Islamic jurisdiction on lawfulness and unlawfulness is set down based on the laws guiding the Muslims and the law can be easily understood as the prohibited or unlawful things that have been stated and anything that's outside of that is opposite (lawful). And Allah the almighty has said in his book : "Don't prohibit for yourselves what I have made lawful for you". The issue of interest or usury in finance which is known as "Ribah" is prohibited for Muslims, because Allah mentioned it in the Qur'an: ' God has permitted trade, and forbidden usury (riba). - Quran 2:275-280.
So with this understanding of the Islamic basics of their jurisdictions, let's check the permissibility of DAO in Islam. Before that, the ruling on the technology itself is that anything in the tech world that will lead us or is built on what Islam has prohibited then every single Muslim must abstain from it. But anything in the world of tech that doesn't violate our beliefs and oppose our rulings then we shall follow it and participate together with them. That's how Muslims have been maintaining their relationship in their communities and also among the leading people in the tech and financial world.
In the current era, the need for implementing blockchain technology, smart contracts, and the phenomenon of cryptocurrencies have attracted the generality of the Islamic community. With the trend to develop a Shriah-compliant decentralized financial platform in parallel to a centralized financial system, CeFi has gained momentum in the Islamic world.
Since blockchain technology and smart contracts have been launched and it has encountered further developments, many people have questioned whether their usage is Shariah-compliant.
The Islamic/Shariah Perspective on DAO
Our Shariah opinion on such newly developed technological developments is "Permissibility" unless Shariah rules and principles prove it wrong, it is permissible.
"The basic principle concerning things is permissibility until evidence indicates that it is forbidden" (Al Zuhaili, 2006, v1, p190)
Similarly, DAO is permissible because there is nothing inherently impermissible in them. Although, it is the usage of such technology that may be permissible or impermissible. A group of people implementing a DAO system only to walk the path acknowledge with the Shariah and abolish the non-shariah complaints sectors not only helps the general Muslim community but also opens the Defi options to the community.
Decentralizing the $3 trillion Islamic Finance industry, Islamic finance could grow even more expensive. It will create global opportunities for Muslim societies and power smart shariah-compliant investment, Islamic-based DeFi, and smart contracts.
When Muslim communities come together with the same aim, interests, and goals with highly dedicated global communities will enable the growth of a halal DAO that will maintain the rulings of the Islamic judging between them and also improve foreign partnership and peaceful collaboration without any bias.
Both prolific and traditional social contracts in Muslim countries are well placed and have been witnessed as a more sustainable financial interest, system and value to Muslim communities and families. With the common practices of the Islamic finance system, this system came into existence along with the divine foundation of Islam. Although, the existence of formal Islamic finance happened only in the 20th century. "Nowadays, the Islamic finance sector grows at 15%-25% per year, while Islamic financial institutions oversee over $2 trillion." And if we could Implement DAO to bring this asset class to advanced trustless investing in the blockchain.
Decentralizing their $3 trillion Islamic Finance industry, Islamic finance could grow even wider. The concept of Islamic crypto has provided good governance, Islamic financial institutions and social smart contracts to Muslim communities globally. If there is an Islamic token, it will help to decentralize the governance of Islamic DAO, which will raise the lifeblood of the proposed future of blockchain ( global decentralization) and also help the Islamic ecosystem globally.
It will create opportunities for Muslim societies and also power smart Mudarabah investment, Islamic DeFi and smart contracts globally.
When Muslim communities come together with the same aim, interests and goals with highly dedicated global communities will enable the growth of Islamic DAO that will maintain the rulings of the Islamic judgings between them and also improve foreign partnership and peaceful collaboration without any bias. This Islamic DAO will enable both public and private Islamic-powered stake participation, from local to state and international Islamic federations.
With Islamic DAO, achieving a more sustainable and last long positive effect on the Muslim masses through Islamic marriage, good governance and a Halal decentralized ecosystem. It has the highest potential of increasing the forecasted ROI with a 10X value.
The $3 trillion global Islamic finance industry is expected to grow 20% - 25% yearly due to the increased Islamic bond and rulings maintenance in the main Islamic finance markets. Even the Islamic finance industry continued to grow in 2020 despite the COVID-19 pandemic, although at a slower and lesser pace than it was going before, even "with global Islamic assets expanding by 10.6% in 2020 against the growth of 17.3% the previous year." (S&P)
The Islamic finance sector does not doubt growing rapidly and steady growth maintenance. But with Islamic DAO, the growing pace could be faster and also change the Islamic communities and the world generally in terms of finance.