Yield farming is a concept that has gained great popularity in recent years in the DeFi world. It’s an investment strategy with which token holders seek to obtain excellent returns for their money, investing and participating in different DeFi platforms, always with the intention of finding any financial advantage that allows them to maximize profits.

Without a doubt, this is a form of investing that can generate excellent returns if done correctly and has quickly gained a lot of momentum for its application on many platforms within the crypto ecosystem.

But what are the 4 types of yield farming and is yield farming halal?

Generally speaking, the 4 types of yield farming are as follows: 1) Liquidity Pools, 2) Lending and Borrowing, 3) Staking (proof of stake), and 4) Holding for a Redistribution Fee. As for if yield farming is halal, not all types of yield farming would be considered halal. It depends on the type of yield farming you participate in.

Let’s take a closer look at each of the 4 types of yield farming and let’s see which type of yield farming would be considered halal and if any of the 4 types of yield farming would be considered haram.

What is yield farming?

Yield farming is a formula by which investors try to obtain profits from the storage of cryptocurrencies. With this investment method we have two key factors to consider:

1. Liquidity provider (LP) – A user who brings cryptocurrencies to the market
2. Liquidity reserve (LR) – A smart contract that validates and manages the funds provided by the LP

Basically, in yield farming, LPs obtain rewards in exchange for providing liquidity through their funds, something similar to the interest paid by banks to those who keep money in them for a certain period of time. But one main difference is that in Islam, it is haram to collect bank interest since it is derived from usury, but with yield farming, some types of yield farming are halal. We’ll touch on this more later in this blog post.

How does yield farming work?

In a yield farming system, investors transfer or deposit assets into a smart contract providing liquidity. In exchange for this, the system will offer them a benefit for the immobilization of these assets.

This can be done through specialized platforms that facilitate the whole process, usually on Ethereum ERC-20 tokens, but since there is no single model or a single system to apply this formula, each platform usually applies its own rules, which can be modified from time to time.

What are the 4 types of yield farming?

Here is a list of the main methods of yield farming that you can find in the market. Of course, it is also possible to find some variations of these methods, but in general, they’re as follows:

1. Liquidity pools

A liquidity pool is perhaps the most common form of yield farming. As I already explained, this works with a smart contract that blocks tokens to ensure liquidity on a decentralized exchange platform. The users who provide these tokens are called liquidity providers.

The liquidity pool will hold two tokens in a smart contract to form a trading pair. Suppose there are tokens “A” and tokens “B”. Suppose also that the price of A can be equal to 100 B.

LPs must contribute the same value of A and B to the pool so that someone who deposits an A token will also have to add 100 B to the same contract. So when someone wants to exchange A for B, they can do it based on the funds deposited in the contract, instead of waiting for another user to appear who wants to do the opposite operation – as happens in crypto exchanges.

LPs are then incentivized for their contribution with different types of rewards, which usually are native tokens of the platform that provides the service.

What are the risks of liquidity pools?

Although this activity can be very profitable, it’s important to be aware of the risk of impermanent loss (IL). This means temporary losses of funds due to the high volatility of the trading pair; the higher the volatility, the higher the IL risk.

In this case, the losses are for less money at the time of withdrawal, which means that a liquidity provider can end up with a greater amount of the B token and slightly less of the A token or vice versa. However, IL can be compensated by trade commissions and other additional rewards earned by LPs.

2. Lending and borrowing

The idea behind a lending and borrowing mechanism is very simple: lenders provide funds to borrowers in exchange for a regular interest rate.

In the crypto world, lending and borrowing are carried out through different types of platforms that can be centralized or decentralized.

If we take this to the world of DeFi, both providers and borrowers interact in fully decentralized platforms in which they have total control over their money, thanks to the use of smart contracts that operate mainly on the Ethereum network.

The way this works is very simple: user X sends a certain amount of funds to a lending platform using a smart contract, which will then provide them with earnings in the form of interest, usually in the platform’s native token.

Such a smart contract then becomes a kind of intermediary available to other users of the platform who want to apply for a loan – the money contained in the smart contract. Subsequently, lenders can withdraw their earnings from the platform from time to time in the form of interest in native tokens.

As a general rule, for a user to be able to request a loan in native tokens, he must previously deposit in the form of a guarantee, an amount in another cryptocurrency, equal to or greater than the amount of the loan that he’s going to request.

What are the risks of lending and borrowing?

Although this financial activity is usually quite safe in the DeFi context, there are also a couple of aspects that need to be considered.

First, there is always the possibility that the smart contract used for the operation receives some type of manipulation. This is more likely in the cases of smart contracts provided by third parties.

On the other hand, borrowing APYs on some cryptocurrencies could suddenly go up for some reason, which could lead to the most careless users ending up paying more than expected.

3. Staking (proof of stake)

Staking within the universe of cryptocurrencies involves keeping a certain amount of funds in a wallet in order to obtain yield for keeping this crypto locked up or “staked” on a blockchain.

This action of holding funds in a crypto wallet, also known as staking, serves to support the security and operations of a blockchain network by validating transactions on the network. In return, they are able to generate yield, or rather, earn cryptocurrency, for providing such a service to the network.

This consensus system is known as Proof of Stake (PoS) and is based on the fact that to obtain consensus, users must demonstrate possession of the indicated funds.

The idea is that users block cryptos and from time to time, the network randomly assigns the right to one of them to validate the next block, the probability of being chosen is directly proportional to the amount of frozen funds held on the network.

In this system and unlike what happens in other consensus mechanisms – such as PoW in Bitcoin – the users who act as validators, don’t compete with each other using the computing power of their equipment, but instead, put up a share of assets to certify that they’ll validate transactions in an honest way.

What are the risks of staking?

In the case of staking, you have to consider the risk of keeping a high amount of funds locked on a blockchain for a long period of time. Remember that there can always be attacks on these platforms that end in the partial or total loss of the funds held, something that has already happened on many occasions.

In addition, in some cases, these funds are placed in the hands of third parties, which implies a risk if there is an internal theft attempt on the platform.

4. Holding for a redistribution fee

Some decentralized exchanges facilitate the buying and selling of different crypto assets between users, but they do so through a model called automated market making (AMM).

Users can add their inactive tokens to the liquidity pools available on the platform and earn passive income according to their contribution and at the same time, other members can exchange tokens from these liquidity pools – the profits go to the community of users.

In the case of SushiSwap for example, anyone can provide liquidity through its internal app. When they do, they’ll receive SLP tokens (SushiSwap Liquidity Provider tokens). For example, for a $SUSHI and $ETH pair, the user would receive SUSHI-ETH SLP tokens.

Any user can create a new liquidity pool simply by providing a new pair, and it’ll be the proportion of tokens that the user adds, which will set the price of this new liquidity pool.

Afterward, other users can trade any ERC-20 token and when transacting on SushiSwap Exchange, a fee of 0.3% will be charged and 0.25% of this trade will go back to the users that make up the LP group.

In exchange for maintaining liquidity in these groups, LPs are rewarded with these fees, in addition to a portion of the SUSHI minted daily on the platform. The best part is that users can claim their funds at any time.

What are the risks of holding?

As with any liquidity pool, there is a risk of suffering losses due to IL, but also that the borrowing APY goes up in price or that the platform suffers from theft of funds.

BONUS

5. Hodling

The term “hodling”, also known as “hold on for dear life” in the crypto world, is used to define those who simply hold onto their cryptocurrency as a long-term investment strategy without worrying about the rise and fall in the price of tokens.

This is not a form of yield farming in its most pure essence, but you can also see it that way for your convenience – especially if you don’t have experience with crypto finances.

Hodling is a strategy used by people who don’t have the skills or the time to perform other types of operations, so these people invest in well-established projects for long-term investment.

The objective of hodlers is that, over time, the value of the selected cryptocurrency will increase, so the most common strategy is to invest in the purchase of relatively new cryptocurrencies with very low prices so that, as the value of these assets increases, they can, insha’Allah, make a good profit on such an investment.

This form of “yield farming” has proven to be one of the strategies that has worked best for Bitcoin users.

For example, if you had invested $1,000 to acquire 1,000 BTC when the price was at $1 during 2011, at the time of publishing this blog post, you would have approximately $60 million in a period of only 10 years!

What are the risks of hodling?

HODLing won’t increase the number of cryptocurrencies you have in your hands. This means that you will only make a profit if the cryptocurrency increases in price in the long term. But remember that the opposite could also happen, with which you would lose money instead of increasing.

Is Yield Farming halal?

Is yield farming halal? When it comes to yield farming, staking, as in Proof of Stake, is generally considered halal, while the other 3 types of yield farming, liquidity pools, lending and borrowing, and yield from redistribution fees would be considered questionable or even haram.

Proof of Stake is generally considered halal as you are earning yield for providing security to the network. This is obviously assuming that the network itself is not dedicated or established for some haram type of activity.

Earning yield from liquidity pools could be halal so long as the pool itself is not being used for haram operations such as loaning money to others to earn interest on the loan. Muslims should strive to not purposely put themselves in situations where they are directly contributing to what is known to be haram.

When it comes to earning yield from lending and borrowing, many scholars would say that this is haram as the objective of most DeFi projects is to establish lending and borrowing contracts that will allow the lender to earn money from interest. However, this may change if lending and borrowing contracts are established under Islamic finance investment tools such as “Murabaha” or other sharia compliant guidelines.

And as for earning yield from redistribution fees, this could also be seen as halal since you are providing a service to the platform so long as the purpose of the platform or DEX is not a lending pool where the goal is to earn interest off of loaning money by way of crypto.

All of this is said by making the assumption that the cryptocurrency you are using for yield farming is already seen as halal by scholars.

Final words

We have now explored the most common types of yield farming strategies, acknowledging that there are many variations in them. If your intention is to enter the world of yield farming, you should first familiarize yourself with the operation of the different platforms that offer this form of investment making sure that they are in harmony with Islamic principles.

Take into account that if you don’t understand what you are doing, you’ll probably lose money. Remember that the most profitable yield farming strategies are also the most complex ones and are recommended for advanced users.

It is not just about buying crypto when Elon Musk makes a comment that boosts its price, but there is a whole range of possibilities to earn much more money out there in a halal way. You just have to be well prepared and do your research.

May Allah guide you to success, Ameen.

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Please note that I am not a financial advisor. The following article is for the sole purpose of providing information on the topic discussed.

As the evolution of blockchain technology advances, numerous new ideas are emerging that seek to change – for the better – the current state of the crypto ecosystem. One idea that stands out as offering innovative solutions to bring about such a change is, Polkadot.

So what is special about Polkadot?

Polkadot’s goal is to develop a blockchain model that will allow cross-communication between a multitude of different blockchain networks thus achieving blockchain interoperability while increasing speed and efficiency in managing a plethora of transactions.

In a previous article, we already talked about Cardano, a project still in development that seeks to solve some of the most important problems in the crypto world; in this new article, we’ll talk about Polkadot, a more recent project, that is just as promising.

Polkadot is a blockchain network with its own cryptocurrency that already stands out among the most popular initiatives in recent times, managing a market capitalization that already exceeds USD $35 billion, surpassing other more well-known assets in the market such as Litecoin and Tron.

Today, you’ll learn everything you need to know about this promising blockchain, the issuer of the DOT cryptocurrency, which has already earned the nickname “Ethereum killer.”

What is Polkadot?

Many developers call it “the blockchain of blockchains.”

Polkadot is a proposal that seeks to serve as an interconnection point between all types of blockchain networks, both public and private, to allow the portability of information.

It has two types of networks, the main network, called Relay Chain, and an indeterminate number of secondary networks called Parachains and Parathreads that users can create to use for whatever purpose they can think of.

This model allows cross-communication between different types of blockchain networks so that they can all be integrated under the Polkadot umbrella.

In this way, the network is presented as an ideal platform to develop any project based on blockchain, including cryptocurrencies.

Polkadot also has its native DOT token, which serves different purposes within the network, but mainly to give the users who possess it, the power to decide democratically on the path that the platform will take.

Polkadot Origins

The project began at the end of 2016 when Gavin Wood, co-founder of Ethereum and founder of Parity Technologies, officially presented the White Paper for the initiative.

After a year of publicizing the project to a small number of stakeholders, in mid-2017, Wood and a group of co-founders, created the Web3 Foundation with the idea of managing the project in conjunction with Parity Technologies.

In October 2017, the pre-sale (ICO) of the DOT token was launched, which was very successful at the time. The initial offering was 5 million tokens at a base price equivalent to USD $30 at that time. The assets were sold on the third day of the pre-sale campaign, capitalizing around USD $150 million.

Two months later, the digital currency quadrupled in value, turning that capital into about $600 million.

Although this initial launch wasn’t exempt from problems, including funds being frozen in Parity Wallets from users, Wood stood firm and went ahead with the project, which today is more stable.

What does Polkadot crypto do?

From the beginning, Polkadot’s goal has been to become a network with the same base characteristics of Ethereum, but at the same time, to offer a solution to its weakest aspects through a series of unique features.

For this, Gavin Wood thought of implementing a whole series of new technologies and consensus protocols specifically to achieve the original goal.

The Polkadot network then seeks to fulfill two fundamental objectives:

1.- Acting as a protocol for sending and processing data.

The idea is that the network can receive information from other chains, process it, and send it back to its origin. This makes it possible to make Polkadot a scalability option for any other type of blockchain.

2.- Operating independently of other chains.

Polkadot must allow the creation of secondary chains with their own characteristics and for specific purposes, such as the execution of smart contracts or the creation of cryptocurrencies and decentralized applications (dApps).

Meeting these objectives, Polkadot becomes a scalability option for large networks such as Ethereum or any other that needs it, also allowing the interconnection of different blockchain ecosystems on the same network.

Given the above, the Polkadot project plans to offer the following to the crypto ecosystem:

Interoperability

To facilitate exchanges and transactions of data and assets between public and private blockchains, smart contracts, dApps, oracles, and other Web3 technologies.

Scalability

Polkadot has validators that ensure the correct operation of multiple chains (parachains) to process higher volumes of transactions in parallel and simultaneously.

Collective security

Polkadot acts as an additional security protocol independent of the protocol of any other network. This provides an additional collective security layer, something especially useful for individual chains where security may not be its strongest feature.

How does Polkadot work?

To allow the interconnection and exchange of data between different blockchains, Polkadot has four well-defined levels or layers:

Relay chain

This is Polkadot’s main blockchain. This is what allows connecting different parachains and facilitates the exchange and transactions of data, assets, and more between them. The Relay Chain is the heart of interoperability between chains, as well as shared security.

Parachains

Parachains are individual blockchains that run in parallel to the Relay Chain. They can be very different from each other, presenting unique characteristics in architecture, governance systems, tokens, etc. Parachains also allow the execution of transactions in parallel, which makes Polkadot a very scalable and secure system.

Parathreads

Parathreads are very similar to parachains, only they are pay-as-you-go. They are a good option for blockchains that don’t need a continuous connection to the main network.

Bridges

Bridges are the technology that makes it possible for parachains to connect and communicate with other external blockchains, such as Bitcoin or Ethereum. This is a breakthrough in the crypto world as in the past, independent blockchains were unable to communicate with each other.

And to make all this work properly, Polkadot has a new type of internal network organization in which we can highlight four main elements:

Validators

Polkadot has a group of validator nodes that are in charge of verifying, validating, and informing the network about the authenticity of the information contained in each block that makes up the blockchain. These blocks are previously created by the following group…

Nominators

Nominators are specialized nodes that are in charge of taking the transactions from the network to group them and generate the metadata and the information of block structure, which is necessary so that the validators can verify the information and include it in the transaction log of the blockchain.

In this way, nominators are responsible for creating secure links between validators and the entire network operation process.

Collators

These nodes help validators to keep a complete history of each specific parachain they work on. Collators must keep updated the information necessary to create new blocks within the parachain, information that will then be passed to the validators to be included in the Polkadot registry.

Fishermen

Since in Polkadot there are several sub-chains that are part of a larger structure – this is known as sharding – the network has a system designed to prevent malicious users from compromising the proper functioning of the protocol.

In this sense, fishermen are nodes responsible for looking for duplicate transactions or any other type of illegal transaction within the network, in exchange for a reward.

These are the four fundamental pieces that are responsible for ensuring that the entire process of generation, verification, validation, and issuance of blocks in the Polkadot blockchain and parachains works correctly, and all running in an asynchronous and parallel way, which guarantees a high-speed network.

Nominated Proof of Stake: the consensus in Polkadot

The harmonious interaction and operation of the above elements are possible thanks to the consensus protocol known as Nominated Proof of Stake or NPoS. This is a slight variation of the Proof of Stake (PoS) protocol in which validators must provide infrastructure and maintenance for the network.

Validators are in charge of producing new blocks, validating them and ultimately guaranteeing overall security.

Of course, validators need an incentive in the form of tokens that motivates them to comply with the rules, because if they don’t, the system will punish them by taking away part of their tokens.

Validators must be in the active set, taking turns to be able to propose, validate and add new blocks.

On the other hand, nominators are the ones who own the tokens that will contribute to the economic support of the network, “nominating” up to 16 validators of their choice with their tokens, also equally distributing the rewards obtained by the validators in the active set they nominated.

Nominators are also subject to penalties for misconduct on the part of one of their nominated validators.

In this consensus mechanism, the system grants a reward to the active group of validators, from which the commissions of each validator are deducted, and the rest of the rewards are distributed among the nominators according to their participation.

And what about smart contracts and tokens in Polkadot?

Polkadot doesn’t offer native support for smart contracts. This prevents the creation of native tokens or dApps on the network. This work corresponds to the parachains, which are extensible and modular, have the ability to create layers of abstraction for the execution of such applications.

This remarkable characteristic allows isolating the impact of resource consumption front these applications, only in the parachains in which they are executed, freeing the rest of the network of that workload, improving at the same time, the general performance.

This modular system also makes the design, programming, distribution, and execution of all kinds of functions in the Polkadot network much easier without the need for native smart contract support.

DOT: the foundation of Polkadot’s economy

Similar to what happens with Ethereum and its Ether, Polkadot uses its native token DOT, as food to keep the entire network running smoothly. DOT has basically three functions:

First, it serves as a mechanism for decentralized governance of the protocol; the DOT token gives validators voting power with which they can participate in the decisions and future evolution of Polkadot.

Second, DOT is also used as a staking system, linking and encouraging validators to act honestly within the network, since there is a financial interest in the verification process.

Third and last, DOT serves as a means for adding, modifying or removing Polkadot parachains, something that offers great flexibility and maintainability to the network.

Is Polkadot better than Ethereum?

Both Ethereum and Polkadot are networks with their respective currencies based on blockchain technology.

While Ethereum integrates smart contracts and allows the development of dApps, Polkadot is a decentralized protocol that, in addition to allowing the integration of smart contracts and dApps, also allows interoperability between different blockchains.

In Polkadot’s case, this fixes a couple of issues related to overall network performance and the communication and exchange of data and assets between different types of blockchains.

On the other hand, the advantages we have just mentioned about Polkadot, are problems that Ethereum is currently facing, but that it plans to solve in its next updates.

In plain theory, Polkadot is certainly superior to Ethereum, but at this time, it’s just theory. Meanwhile, Ethereum has been around for years.

Only when in the not too distant future both Polkadot and Ethereum 2.0 meet face to face on the market and are fully operational, it’ll be seen which project is truly superior.

Pros and cons of Polkadot

Advantages of Polkadot

1. Offers great flexibility for developers who want to create new specialized chains (parachains)
2. Allows both secondary chains and dApps to be integrated into a shared security model quickly and easily
3. Allows connection with other external networks, both public and private
4. It is currently listed as one of the top big blockchain interests evidenced by its large market capitalization

Disadvantages of Polkadot

1. Polkadot isn’t alone and must compete with other big players with Ethereum being the one that has the most advantage
2. Some network vulnerabilities such as smart contract bugs which ended up freezing hundreds of millions of dollars of funds in multiple wallets
3. Time is still needed for the development of the project to be 100% finished, which can work against it.

Is Polkadot halal?

Is Polkadot halal? Yes, scholars who generally rule that cryptocurrency is halal also consider Polkadot (DOT) as halal. DOT is seen as a utility token as it serves multiple functions on the Polkadot blockchain. Scholars would normally classify DOT as an asset and not as a currency.

The future of Polkadot

Today, many investors and developers believe that Polkadot has what it takes to become the benchmark in the crypto space in the future.

It’s important to consider that at this moment, the majority of Polkadot’s supporters are developers, who see great enthusiasm about the great possibilities that this network will offer to integrate the entire blockchain ecosystem in one place.

Many investors share the same enthusiasm as developers, and while many of them are active in Ethereum, if they see a sustainable evolution and adoption of Polkadot in the near future, it’s very likely that a large number of investors will switch to Polkadot.

In this sense, it’s worth highlighting the question whose answer most people want to know right now:

Is Polkadot a good investment?

The movements of the entire crypto space are highly dependent on the movements of Bitcoin; you just have to observe how the recent massive institutional adoption of BTC triggered a rice in price in BTC along with numerous digital assets (altcoins).

Due to this, many investors now see more sense in owning other assets in addition to or rather than owning DOT.

However, many know that Polkadot’s multi-chain proposal is the future towards which the crypto world is heading – there are already near 200 projects under development in Polkadot – so this ambitious project shouldn’t be ignored.

Conclusion

There is no doubt that Polkadot, with all its unique features and the great support it is receiving from developers, is gaining a lot of momentum in the crypto ecosystem.

Right now, there are an increasing number of projects under development around Polkadot, all of which are gaining in value. This appears to be positively influencing DOT’s value, and that’s something investors are closely watching.

Most likely, when the project is completed, it’ll end up taking a strong position in the market in this fierce blockchain war.

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