Yield Farming with Crypto on Binance? | An Islamic Guide
Earning with Crypto on Binance | An Islamic Guide
As regular readers will know, Mohsin and I have been investing in cryptocurrency this year and we’ve been on a steep learning curve.
Historically we have simply bought coins and held, however recently we have been looking into earning a yield through crypto and have shared our practical guidance on the Islamic analysis we did as well as where we bought (and what we bought – for the little that that is worth).
We focus specifically on Binance as the crypto exchange – as that is where we do the majority of our trading. It also happens to be an exchange that is completely labyrinthine in its layout so we figured it’s actually helpful to guide people on that.
Why should I care about yield in crypto?
Assets lying around doing nothing
Let’s face it, with crypto and most other investments, there is a lot of assets just lying around doing nothing. So if you can put them to work without risking them, that sounds like a useful endeavour.
And crypto these days is offering serious annualised returns anywhere between 3-40% (and I’ve seen even as high as 90%). Of course, usually, the higher the annualised return the more speculative it is. But even at the lower end, those kind of returns are about 3-4x what the best mainstream savings accounts are offering (though of course they are much safer).
The numbers don’t lie
Let’s give some hard numbers to clarify things. Let’s assume you invest in Bitcoin. Over the last 4 years it has gone up 5x. Let’s assume it will continue to grow over the next 4 years to return 3x. If you invest £5000 at a 10% compounding return for 4 years, without any capital appreciation it returns around £7,500, and with capital appreciation you’re probably looking at closer to £20-25k.
Without any yield activity your return would be closer to £15k.
So that’s an improvement of 40-60% on the total return.
Long story short, if you’re investing in crypto for the long-term anyway, it is worth exploring the safer types of yield-generation, simply because it’ll add to your bottom line quite significantly.
What is yield farming vs crypto staking vs liquidity mining vs lending cryptocurrency?
We have covered staking more extensively here, but in a nutshell, you can earn a fixed yield on your cryptocurrencies through a variety of means. These include:
- Yield farming
- Liquidity mining
- Staking cryptocurrency
- Lending cryptocurrency
Unfortunately, the information on the internet is not as simple and clear as one would like, and usually there is no Islamic analysis on the question being discussed.
For people who do not care about sharia-compliance, items (1) to (4) are largely the same apart from the varying risk dynamics to each yielding strategy. For them, each strategy returns a fixed yield.
A note on definitions
This unfortunately means that other analysis online will lump things together or not dig into the level of granularity a Muslim requires to make a decision if an investment is haram or halal.
This therefore means that Muslims should be aware of the fact that there are no confirmed and fixed definitions of all these terms and even the largest crypto players can use them rather loosely.
So what is halal for a Muslim?
Let’s set aside the terms “yield farming”, “liquidity mining”, “staking” and “lending” and just look at how you will be remunerated as an investor:
1. Get money for being a broker
You get remunerated because you provide liquidity to an Automated Market Maker (“AMM”) such as Uniswap or Pancake. These are automated brokers (think AJ Bell, or Hargreaves Lansdown, but for crypto and completely automated so that the crypto protocol itself does the brokerage work without any need for human brokers).
2. Get money for being part of a PoS project
You get remunerated as you are part of Proof of Stake (“PoS”) crypto project and basically you just staking that coin enables you to be part of the mining of new coins – and that is how you earn (as you get a portion of the newly minted coin, for example).
3. Get money for lending your coins for interest
You get remunerated as you are lending your coins to a broker or exchange (such as Binance) who then use those coins to lend out to others and earn an interest rate – and then pass a portion of that interest back over to you.
Yield farming is typically associated with either (1) or (3).
Liquidity mining usually means (1) but can also mean (2).
Crypto staking usually means (1) or (2).
Crypto lending usually means (3).
As discussed in our staking article, and in our top 50 crypto analysis for Uniswap, our view is that (1) and (2) are generally permissible, while (3) generally is not.
The reason for the “generally” is that each crypto project can vary in its mechanics and crypto is a rapidly changing landscape, so it isn’t really possible to give a definitive answer at this stage.
What is halal on Binance?
Now we’ve cleared up what is generally halal, let’s now apply that to Binance.
You’ll find the following options available on Binance under their “finance” section:
- Liquid Swap
- Dual Investment
- BNB Vault
- Crypto Loans
There are also the “Pay” and “Card” options but we won’t cover those here as they’re not ways to earn with Binance.
|Earning Options||Sharia Analysis|
|Staking||This is in principle permissible – though also depends on the underlying crypto project you are staking in.
Note that Binance refers to it as an “annual interest rate”. That doesn’t necessarily mean it is riba under Islamic law. We consider it a profit-share on the brokerage fees.
There is also a section called “DeFi Staking”. I would avoid this – as you are usually going to be staking into underlying lending-based protocols such as Venus and others.
Locking in your coins for longer gives you a better return – again, this is permissible in our view – as you’re not getting paid more interest, you’re getting paid a higher share of the profit share in our analysis.
|Savings||You are lending your coins for interest. This is haram.|
|Liquid Swap||Liquidity Swap is a place where you are provided liquidity (or provide liquidity) so that you can just directly swap between two crypto projects.
The underlying idea here is that doing this is cheaper than going via the central Binance exchange.
But in order to provide this “exchange within an exchange” you need liquidity. And that’s why you get rewarded for providing that liquidity to a particular cryptocurrency pair.
So a similar analysis to staking applies here as you’re enabling a brokerage-type offering and getting a profit-share.
|Pool||This is Binance’s mining product that allows you to pool up with others so that you can mine BTC and ETH.
I flag that I haven’t gone through this section in detail but looks generally permissible.
|Dual Investment||This looks like a structured product that basically enters you into two trades on opposing sides of the same cryptocurrency pair.
We haven’t looked into the detail of this so can’t comment on the sharia compliance. I personally have stayed away for now.
|BNB Vault||BNB provide a service where they take your BNB coins and allocate them across a range of their earning products.
Unfortunately, this includes the saving and launchpad function. Savings is haram as discussed above, while Launchpad may involve impermissible crypto projects launching which you may inadvertently end earning from.
So one to avoid.
|ETH2.0||This is basically staking into ETH2.0. So the staking analysis applies. So permissible in principle.|
|Crypto Loans||You’re borrowing cryptocurrency and paying interest. This is obviously haram.|
This is the analysis on Binance’s current offerings, however it should roughly match up with the offerings of most other large brokers too. If you’d like us to do other large brokers in a separate article let us know in our Telegram group (link below).
What did I buy?
I ultimately decided to go for staking CAKE (Pancake) for a period of 30 days. This is not investment advice as you will all know – and your capital is at risk – but let me talk you through my thinking as it may be helpful to shape how you approach investing.
Firstly, I have only staked around 15% of my overall crypto portfolio into this investment strategy and I’d like to understand the mechanics of it and how things play out.
Secondly, I decided to go for CAKE and staking rather than the considerably more aggressive returns you can see in some of the Liquid Swap currency pairs.
The thinking here is that ultimately you don’t want to go into yield-generating investments without also having a good sense of the underlying crypto project you’re investing in – as that will be your capital gain or loss.
I know CAKE is a bit more aggressive than just going for Bitcoin or Ethereum, but it is now the largest AMM on the Binance rails, so in that sense, I see it as a promising long-term investment that should track the general growth of crypto generally. And I’m long-term bullish on crypto as well as generally happy to take some risk.
An additional practical note – you have to buy CAKE (or whatever crypto project you go for) first before you can stake it.
We plan to cover further topics in this emerging and complex world of crypto as we dive deeper into it. Let us know what else we should cover on our Crypto Telegram group.
There are over 10k people on the Telegram and some extremely knowledgeable investors too. We also have a regular Monday voice room where people can chat and exchange ideas. Join us!
Also, as ever, please note that these articles are not fatawa and, whilst educated on Islamic financial topics, we are not muftis or senior scholars. That’s why we always make sure we show you our reasoning and thinking so you can clearly follow that and then make your own mind up.