What is NEAR Protocol? Is it Halal?

What is NEAR?

NEAR Protocol is a climate-neutral layer-1 blockchain that has fast and low-cost transactions. It is a smart contract platform that is a direct competitor to the likes of Ethereum and Avalanche.

As a smart contract platform with no inherent impermissible activities, we believe NEAR is halal. However, care needs to be taken to ensure that NEAR doesn’t overwhelmingly become associated with haram activities. Read on for a much deeper dive into NEAR itself and the Islamic views on it.

What does NEAR do?

NEAR is a smart contract platform that wants to make it easy for developers to build decentralized applications (DAPPs). They want it to challenge the status quo and build a platform that can rival traditional industries such as finance.

Smart contracts are self-executing agreements that automatically execute certain actions once the predetermined conditions have been met. It can be summarised as an if-then protocol. If the conditions are met then an action is performed. Smart contracts form the basis of decentralized applications (DAPPs), which is a key functionality of NEAR.

Smart contracts allow for transactions to be carried out without the need for a third-party authority, as the code will automatically execute. This could result in cost savings and increased transaction speeds. For example, if you are a footballer, you could create a smart contract that automatically triggers bonuses for you when you score a goal or make an assist by connecting the contract to the official match statistics.

NEAR is a direct competitor to Ethereum. Ethereum, the second-largest cryptocurrency, is a layer-1 blockchain and is the original smart contract platform. Ethereum’s network has become congested as demand has exploded, which has led to slow transactions and expensive transaction (gas) fees. For more on Ethereum, read our deep dive here.

NEAR believes it has the answer to these limitations. It has created a platform that facilitates fast and cheap transactions and its network has been certified as climate-neutral by South Pole.

How does NEAR work technically?

NEAR describes itself as a sharded proof of stake blockchain. Let’s break down what sharded and proof of stake means.

Typically blockchain networks will require every node (each computer that runs the blockchain’s software) to process every transaction. This causes slow transaction speeds and increasing fees as demand increases and is unsustainable in the long run.

Sharding purports to solve this problem by splitting the work among all the participating nodes, instead of all the nodes doing the same work. This is done by splitting the network into shards (think fragments).

As demand increases, NEAR can continue to scale by increasing the number of shards. This is what will fundamentally allow the NEAR blockchain to have fast processing speeds and cheap fees as the network scales.

NEAR uses a proof of stake (POS) consensus mechanism to approve transactions and add them to the blockchain. This is in contrast to Bitcoin and Ethereum (for now) which use proof of work (POW). POW is where miners compete to solve problems to win the right to certify blocks of transactions and obtain a block reward of tokens in the process as well as the transaction fees.

In POS, instead of miners certifying transactions, you have ‘validators’. These validators are generally chosen at random based on how much of the network’s token they have locked up (i.e. their stake). With NEAR, validators are chosen through a regular on-chain auction process. POS is popular as it requires considerably less energy than POW, although POW proponents argue that their method is more secure.

NEAR can also connect to Ethereum. It does so via its ‘Rainbow Bridge’ which allows assets to be transferred between the two blockchains. This makes it easier for Ethereum projects to migrate over to NEAR.

What are the use cases of NEAR?

NEAR has three broad use cases:

1. . Decentralized Finance (DeFi). DeFi is essentially finance conducted without a central authority (banks, governments etc). Rather, it is an internet-based peer-to-peer financial system based on blockchain technology. For more on DeFi, check out our deep dive here.
2. . Non-Fungible Tokens (NFTs). NFTs are digital tokens that can represent a unique asset, allowing them to be traded, supporting digital artwork marketplaces to digital ticketing.  For more on NFTs, check out Ibrahim’s video here.
3. . Decentralised Autonomous Orgs (DAOs). DAOs are community-led blockchain protocols that are self-governed by a set of rules. These rules are agreed upon by the members and encoded into smart contracts which automatically execute actions. DAOs can be used for objectives such as crowdfunding, where all the members pool together funds to use for a common aim.

Are people using NEAR right now?

Yes at the time of writing, over the past week there have been ~ 320k daily average transactions on the NEAR network. However, this is substantially less than Ethereum’s ~1m daily recorded transactions.

When evaluating DeFi platforms, a useful metric to use is Total Value Locked (TVL). The TVL represents the total value locked in a network’s DeFi protocols and indicates how popular a network is. NEAR’s TVL of $365m is the 17th largest in the space. However, this is dwarfed by Ethereum’s TVL of $56bn, which for now is still the undisputed king of the DeFi space.

What are the Strengths and Weaknesses of NEAR?

Strengths

• Fast processing times
• Near zero transaction fees
• Widely available on crypto exchanges
• Environmentally friendly with its carbon-neutral certification
• User-friendly with human-readable account names instead of long strings. For example, if Mohsin was to open a NEAR account, his account name would be mohsin.near instead of 0x34G7656JK7oi88b140dwfLP93SD1r3A5f6q8357Y
• NEAR is connected to Ethereum by a bridge which makes it easy for any Ethereum-based projects to migrate over to NEAR’s network
• Sharding functionality allows it to continuously scale, addressing one of Ethereum’s main weaknesses
• NEAR attracts developers by sharing a portion of the transaction fees earned from smart contracts that they create

Weaknesses

• There is a lot of competition as the smart contract space is quite congested
• NEAR has some way to go to catch up to the runaway leader Ethereum
• If Ethereum successfully executes its planned migration to POS and incorporates sharding, this could reduce NEAR’s competitive advantage
• NEAR has high price volatility and thus is a high-risk investment

Is NEAR a Good Investment?

NEAR is one of the most established cryptocurrencies and currently is the 25th largest cryptocurrency with a market capitalization of $3.9bn. AVAX can be bought from most exchanges including Coinbase and Binance. It reached a peak of $20.42 in January 2022 and is currently trading around $4.22 at the time of writing, having lost a whopping 80% of its peak value.

The smart contract platform space is congested with many competitors. Yet NEAR’s focus on user experience, fast transactions, low costs, environmental credentials and sharding functionality are strong competitive advantages.

Its sharding functionality is a key strength, allowing it to continuously scale, addressing one of Ethereum’s main weaknesses. However, Ethereum is indisputably the key leader in this space and if it successfully delivers its planned migration, it could mitigate many of NEAR’s advantages.

As the industry is still new, it’s hard to definitively say which projects will come out on top. Therefore, it could be prudent to be conservative and refrain from over-committing to any single project. Instead, you should spread your investments across multiple projects.

Alternatives to NEAR

Ethereum (ETH)

Ethereum is the second-largest cryptocurrency and is the original smart contract platform. NEAR is trying to disrupt Ethereum but Ethereum has a big lead over it, in terms of active developers and platform usage. Ethereum is also planning a migration from the proof of work consensus system to a proof of stake system.

It is also working on integrating sharding. These developments would help it bolster its eco-friendly credentials and result in cheaper and quicker transactions. However, this migration has already been delayed many times and carries plenty of execution risk. For more on Ethereum, read our deep dive here.

Polkadot (DOT)

Polkadot was founded by Ethereum co-founder Gavin Wood after becoming disillusioned with the development of Ethereum. It currently is the 11th largest cryptocurrency with a market capitalization of $9 billion.

It already uses a proof of stake consensus mechanism unlike Ethereum and has a strong focus on ‘interoperability’. Polkadot was founded on the belief that there will be no one single winner in the cryptocurrency but instead will be multiple successful projects. Their goal is to facilitate this ‘interoperability’ by connecting multiple blockchains. This team-player approach gives them a strong edge over other similar projects.

Also read: What is Polkadot (DOT)? Is it halal?

Solana (SOL)

Solana is another smart contract platform that was one of the biggest success stories of the recent bull run. Its price sensationally went from $0.5 in May 2020 to $260 in Nov 2021.

Its price has now settled at $41 in the current market downturn but it is still the 9th largest cryptocurrency. Solana is known for its lightning-fast processing speeds and low transaction costs. However, it has struggled with network outages on seven separate occasions over the past year showing that there is still work to be done.

Is NEAR Halal?

Sharia analysis

When it comes to cryptocurrency in general, our view is that investing in crypto is halal as long as the project itself is halal. We see cryptocurrency as a type of digital asset (with the potential for some to become fully-fledged currencies).

We don’t find there to be anything problematic from an Islamic perspective about blockchain technology, and cryptocurrency which is a use of blockchain and seeking to profit from it. For more on our approach to crypto, check out this article.

You want to avoid projects where:

• the technology underpinning the project is intrinsically linked to a haram transaction (e.g. interest-based lending)
• the ecosystem that they are creating is so inextricably tied up with illicit/immoral activities that it would be inappropriate to support such an ecosystem (e.g. a project geared solely towards gambling)

The case for yes and why

Just like Bitcoin, most scholars hold Ethereum to be halal. We also share this view. NEAR is similar to Ethereum and therefore by extension, we would deem it to be halal due to a similar analysis to ETH.

However, it’s worth paying attention to NEAR’s DeFi activity as unfortunately many of the activities in that space are riba-based. If the association between NEAR and impermissible activities becomes overt, then this analysis would change.

The case for no and why

If you follow the opinion that crypto isn’t permissible, then NEAR by extension would also not be permissible.

Conclusion

In summary, NEAR is a solid smart contract platform that is eco-friendly and has fast and low-cost transactions. Its sharding functionality in particular is a key strength, allowing it to continuously scale, addressing one of Ethereum’s main weaknesses. However, Ethereum is still the undisputed leader and it’ll take some effort to dislodge it.

We are satisfied that it is indeed a halal asset and thus permissible for Muslim investors to buy.