DeFi in the World of Islamic Finance
Introduction
If you’ve delved a little into crypto, you’ve probably heard the word ‘DeFi’ being thrown around.
When it comes to cryptocurrencies, almost everyone wants to get in on the exciting gains that have seemingly happened since the inception of Bitcoin in 2008. However, some people may have limited their exposure to crypto products, such as DeFi, because of their religious beliefs.
DeFi is decentralized finance, and one of its many great use cases is offering those who lend out their money interest as a reward for sending money to lending pools, where borrowers can borrow the asset and must make interest payments on their loan.
This article is going to explain DeFi in simple terms. Explaining how DeFi can make Islamic Finance better
For the global Muslim community, interacting with crypto raises some questions: is it halal? Does it follow sharia law? However, new halal DeFi solutions offer ethical interactions with crypto and Web3 technologies.
What is DeFi?
DeFi — short for decentralized finance — is a new vision of banking and financial services based on peer-to-peer payments through blockchain technology. DeFi allows “trust-less” banking via blockchain, sidestepping traditional financial middlemen such as banks or brokers.
DeFi eliminates the fees that banks and other financial companies charge for using their services. Individuals hold money in a secure digital wallet, can transfer funds in minutes, and anyone with an internet connection can use DeFi.
Is DeFi Halal?
At the bottom, there is nothing haram about DeFi per se. In fact, at its core, it is arguably more Islamic.
Like with most crypto-related matters, you need to look at what is happening in the particular project you are participating in.
One critical thing with DeFi is that many people are put off because of the use of the word ‘interest.’
The critical thing to remember is that people might be using the term ‘interest’ in DeFi without actually meaning it. So it could be wonderful.
The most crucial point to remember is that no blanket rule can cover every project. If you are in doubt about the permissibility of a project, make sure to, get it screened by a scholar trained in Islamic finance.
For example, “most Islamic scholars globally have thumbed currencies like Bitcoin and Ethereum as always Sharia compliant because the underlying technology is accepted.”
How DeFi can make Islamic Finance better
1. It enables borderless payment
No borders. As is the case with everything in the world of cryptocurrency, DeFi does not have geographical limitations. Anyone with access to the Internet and crypto wallets can interact with DeFi.
Many people in the Islamic state who don’t have access to the western payment system can now use DeFi to send and receive money from anywhere in the world.
2. Faster speed
A lack of intermediaries and borders, combined with the superior speed of blockchain technology, results in faster transactions and easier access to the services.
It gives people access to a speed faster than traditional banks. In DeFi, the transaction is in a matter of seconds. In contrast, it may take three days in traditional banks for a transaction to be confirmed.
3. Improved transparency
The rate of online scams is alarming, and there is a trust crisis in the world; people don’t trust each other.
However, in DeFi, you don’t have to trust the other person you are transacting with; all you need to do is to rely on the code.
Everything in DeFi is governed by a smart contract, enhancing transparency between parties.
4. Quick and permanent access
Before DeFi, if you needed to get a loan, you would have to go to the bank, and a lot of time will be wasted. With DeFi, you can get a loan with just one click, even in the middle of the night. You can access the market from anywhere and anytime as long as you have an internet connection.
5. A Healthier system
Covid-19 has shown that traditional financial systems (CeFi) are vulnerable to global shocks. This is because centralized financial systems are based on direct contact between individuals.
COVID-19 has caused an economic shock three times worse than the 2008 financial crisis — economist Nariman Behravesh
The level of physical contact needed to support decentralized financial systems (DeFi) could drop to zero, and cryptocurrency prices and companies have been going from strength to strength in the current health crisis.
Bottomline
The impact of DeFi is felt everywhere, especially in Islamic states, because it gives people equal access to funds. It is in the mission to give everyone privacy over their funds.
With the advent of DeFi, you can make transactions with people in other countries without even using the banking system, and you now have access to loans with less bureaucracy.
