Alongside Bitcoin, Ethereum stands as the most revolutionary technology in the crypto space. In this article we'll do a full breakdown of what Ethereum is so you can impress your friends in the mosque with your knowledge. We'll also cover the Islamic angle to Ethereum and discuss the halal and the haram.
Ethereum is also a revolutionary digital currency just like Bitcoin, but it is much more useful than Bitcoin. It’s based on the same underlying technology like blockchain, which means it is decentralised and not controlled by a central authority.
Much of DeFi ecosystem, and many underlying transactions in crypto such as NFTs, are built on the Ethereum network and its Ether token (the currency of the Ethereum blockchain). Which means Ethereum is arguably the true currency of the future.
Just like Bitcoin, most scholars hold Ethereum and its Ether (ETH) token to be halal. We also share this view.
Read on for a deep dive into Ethereum and the Islamic views on it.
What is Ethereum?
Vitalik Buterin published the Ethereum white paper in 2014 and launched the project in 2015. It was conceived as a next-generation smart contract and decentralised application platform.
To put it more simply: developers can use the open-source software to create their own cryptocurrencies and digital applications.
Ethereum is an open-source software protocol upon which most of the DeFi and NFT ecosystems are built.
So Ethereum is the basic building block of the DeFi space. To create anything substantial using blockchain technology, you can use Ethereum.
The Ethereum network is scalable, programmable, and decentralised. Because of this, entrepreneurs, developers, and artists are creating next-generation technology, apps, and art using Ethereum. They are changing entire industries and eventually life as we know it.
Ethereum is a decentralised blockchain network that is powered by the Ether token. Ether allows users to transact, lend, earn money through crypto staking, access and store Non-Fungible Tokens (NFTs), play games, use decentralised applications, form decentralised autonomous organisations (DAOs), and of course, trade cryptocurrencies.
What does Ethereum do?
The founders of Ethereum saw the potential for blockchain technology as more than just a decentralised currency. Having seen the revolution of Bitcoin, they knew there was more to blockchain and cryptocurrency than just currency.
While Bitcoin was conceived as just a decentralised digital currency, Ethereum is known as ‘the world’s programmable blockchain’.
The idea was that blockchain could become just as useful as the internet itself. Everything that required two parties to come together or required a network could eventually be based on the blockchain, securely and decentralised.
While Bitcoin stores and records data on countless computers around the world, Ethereum takes this one step further.
Ethereum runs code on computers around the world in addition to recording data. These lines of code are called smart contracts. Smart contracts are self-triggering lines of code that execute once certain conditions are met. If x condition is met, y will happen.
So Ethereum is like one giant decentralised operating system running on many computers around the world.
How does Ethereum work technically?
It helps to understand Ethereum by comparing it to Bitcoin. Let’s take a look at some of the technical underpinnings of Ethereum especially when compared to Bitcoin.
Ethereum has a blockchain just like Bitcoin. The blocks on the Ethereum blockchain contain transactions and smart contracts data.
You can find out more about blockchain technology here.
Blockchain allows users to mine and validate blocks for other users without the need for a central authority. Blocks form a chain by referencing the fingerprint of the previous block.
Ethereum uses something called Proof-of-Work to create new blocks on the blockchain just like Bitcoin.
When a new transaction is requested, a new potential block is created. Miners have to dedicate high CPU computers and electricity to solve cryptographic puzzles. This is then validated by other miners and the block is added to the blockchain. When the majority of nodes validate it, a consensus is reached.
The advantage of this Proof-of-Work system is that hackers would have to dedicate so much energy and CPU power that the costs outweigh the benefits.
Unlike Bitcoin, Ethereum plans to move to a Proof-of-Stake system
The advantage of a Proof-of-Stake system is that it does not require high energy usage. In this system users ‘lock’ their Ether tokens in their wallet. Users are selected randomly based on how many tokens they hold. The user chosen at random is rewarded with a token, and a new block is added to the blockchain.
The more funds you hold in your wallet the more coins you can earn through this staking system.
Public and permissionless
Just like Bitcoin, the Ethereum network is public and permissionless.
This means that anyone can download the relevant software to connect to the network and make transactions or decentralised apps. This can all be done without signing up to a central authority or organisation.
Anyone can mine and validate blocks, as long as you have access to the internet.
Just like Bitcoin, you can modify the relevant Ethereum software and create ‘private’ networks based on the Ethereum network. Once taken private, you can disconnect this private network from the public version and use private tokens and smart contracts.
Ethereum Virtual Machine (EVM)
Smart contracts executed within the Ethereum network are based on advanced code deployed by developers.
This code runs on the Ethereum Virtual Machine (EVM). EVM is like a giant distributed operating system that runs on the computers of all participants in the network.
EVM basically ‘translates’ the code so that computers can read it. Any time a smart contract is executed on the Ethereum network, this code is being run using EVM.
What are the use cases of Ethereum?
Ethereum has multiple use cases:
DeFi and currency
Just like Bitcoin, users can trade and lend the Ether token using the Ethereum network.
The Ethereum network is programmable, so developers can use the Ethereum network to create their own cryptocurrencies to trade and lend. This powerful feature has given birth to an entire DeFi ecosystem of various cryptocurrencies.
These cryptocurrencies can be bought using Ether and are based on the ERC-20 standard which allows them to operate on exchanges and interact with the network.
These are tokens that can be attached to unique items, such as art. These unique tokens are not interchangeable like a standard Ether token. An NFT is secured on the Ethereum network and can only have one owner at a time. NFTs can be sold on global markets powered by the Ethereum network.
Decentralised Autonomous Organisations (DAOs)
DAOs are open-source organisations without a central authority that are based on the blockchain.
DAOs use smart contracts powered by the Ethereum network. They are governed by rules that are coded in the software and the community of stakeholders get to vote on decisions.
Enterprise Ethereum refers to guidelines and software that aim to allow the Ethereum network to be used privately by businesses.
Businesses can leverage the power of the Ethereum network to create a private version of the network tailored to the business. These private networks can be permissioned, meaning that the business has total control over the infrastructure and users within the network.
The Enterprise Ethereum Alliance (EEA) is a member-led organisation comprising various corporations and businesses that work together to develop and promote best practices in enterprise-grade blockchain technology. Members include world-renown names such as JP Morgan, FedEx, and Microsoft.
Are people using Ethereum right now?
The ticker for the Ether token is ETH.
Since 2020, there have consistently been more than 1 million ETH transactions every day. The current market cap of the entirety of all ETH tokens currently sits at just over $250 billion, which represents a significant portion of the entire crypto space. There are over 120 million ETH tokens currently in circulating supply, which is analogous to the public float of shares.
Ether definitively takes the number two spot in the entire crypto and DeFi space behind Bitcoin, the original cryptocurrency. ETH has a market dominance of almost 20%, whilst Bitcoin has a market dominance of over 44%.
These two cryptocurrencies form a duopoly in the DeFi space as clear juggernauts, with all other cryptocurrencies having smaller portions of dominance in the market.
Because of Ethereum’s smart contract technology, Enterprise Ethereum means even corporations and large organisations are utilising the Ethereum software for their own purposes.
What are the strengths and weaknesses of Ethereum?
Ether is the second largest cryptocurrency behind only Bitcoin, this gives it a veneer of reliability as much as there can be any reliability in the volatile crypto space!
Due to its programmable nature, most crypto and DeFi infrastructure is built on Ethereum. It boasts more developer activity and decentralised applications than any other network. The genius of smart contracts allow it to truly be a contender for the future of the internet.
Ethereum now has strong network effects because of the multitude of developers and Enterprise Ethereum. It is solving real world problems. Companies and developers are developing and improving the use cases of Ethereum all the time.
The Ethereum network is still a work in progress. With the planned move to Ethereum 2.0 and the Proof-of-Stake version, there is an inherent uncertainty for serious investors and users with such a large project. This move has also been delayed several times.
Ethereum faces competition from newer networks, such as Cardano and Polkadot, which claim to improve upon the technology behind Ethereum. There are also arguably more efficient technologies compared to blockchain, such as hashgraph.
Ethereum may face scaling issues when it becomes too big. If the goal is to become the core infrastructure of the entirety of the DeFi space, it may become too big to handle for nodes and casual users.
Is Ethereum a good investment?
Most forward-thinking financial advisors will tell you that dedicating a small percentage of your portfolio to crypto may be a good investment. Of course, you should always speak to a trusted financial advisor when it comes to the specifics of your own portfolio.
Putting a small percentage of your portfolio means that you can benefit from some of the potentially dazzling increases in crypto whilst also not going bankrupt if crypto were to take a really deep nosedive.
We’ve written a whole guide on how to invest in crypto the Islamic way, check that out for a good walkthrough on how to actually begin investing.
Due to how integral it is to the crypto space and how popular it is, you can invest in ETH in any crypto exchange you choose. From Coinbase to Binance to Swissborg, they will all allow you to trade ETH.
ETH is a great way to get exposure to the crypto space due to its market dominance and how much of the DeFi space actually relies on Ethereum. It’s so crucial to the space that there would not be a Web 3.0 revolution without it.
5 years ago ETH was worth just over $150. After a dizzying increase of 1200% in the space of 5 years, the current ETH price stands at just over $2000. The ETH price rocketing beyond anyone’s imagination is a good demonstration of how interest in DeFi and crypto, and therefore ETH as DeFi is all mostly built on Ethereum, has skyrocketed.
One thing to note is that whilst the highs in the crypto space are higher than in stocks, the lows are much lower too.
Looking at the above chart, we see that in the past couple of years there have been multiple big drawdowns. In fact, following the rest of the market, the ETH price has also nosedived 32% from $3400 in April 2022 to its current price of around $2000.
Despite significant drawdowns, ETH has still produced massive returns. And with interest and investment in the crypto space only increasing, ETH stands as one of the tokens to buy and hold in the DeFi space.
Alternatives to Ethereum
Whilst Ethereum currently dominates 80% of the NFT market, this is reportedly declining as the months go by due to competitors.
Ethereum’s planned upgrade is yet to arrive, and in the meantime many competitors are trying to build on Ethereum’s technology to offer users something more. There are various competitors to Ethereum that offer smart contract and development opportunities.
Ethereum is still the clear leader in the DeFi space, but the below are increasingly chipping away at its market share.
Cardano (ADA) holds the number 7 spot by market capitalisation, almost $20 billion. Cardano was founded based on peer-reviewed research and evidence-based methods, lending it technical credibility.
Cardano claims to be the most environmentally friendly blockchain network, using only the power of 600 homes annually, which is comparatively less compared to the colossal energy usage of other major cryptocurrencies. This makes it more sustainable in the long-term.
Currently number 8, Solana (SOL) has a market capitalisation of almost $19 billion. While still tiny compared to Ether’s $250 billion, Solana has the confidence of large institutions such as JP Morgan and Bank of America.
The main edge Solana has over Ethereum is faster transaction speeds and lower fees, which can make it more of a mainstream competitor in the long-run.
Coming in the 11th spot with a market capitalisation of $11 billion, Polkadot (DOT) is well-known in the crypto space for its ‘interoperability’ feature.
This allows several blockchains together to form one larger network, allowing data to be shared securely and efficiently. This cross-chain collaboration is so important for the future of Web 3.0 and the internet at large, that Polkadot can seriously be considered one of the core digital infrastructures of the future and slowly gain market dominance.
Is Ethereum Halal?
Just like Bitcoin, most scholars hold Ethereum and its Ether (ETH) token to be halal. We also share this view.
The essence of the debate on whether cryptocurrencies are halal comes down to whether they are ‘Māl’ as we have explained previously. Māl is something that can be acquired, whether it be an item or a service.
There are three stances on cryptocurrencies today:
Cryptocurrency is not Māl, rather it is a speculative, non-Sharia-compliant investment.
Cryptocurrency is a digital asset but not a currency.
Cryptocurrency is a digital currency.
Proponents of view (1) argue that cryptocurrencies are not Sharia-compliant since they have no intrinsic value and are merely entries on a digital ledger.
Our view has always been that (1) does not seem right since cryptocurrencies have value as millions of people are willing to buy, hold, and trade them. They are just as real as fiat currency today which mostly exists in the spreadsheets of banks. Our monetary system became predominantly digital a while ago.
View (2) seems to be the most realistic view, as cryptocurrencies are a new and emerging technology that are yet to mature into fully fledged currencies used by economies at large. However, in practice, there is no real difference for casual users between (2) and (3) since they both consider trading cryptocurrencies to be permissible.
Ethereum, along with Bitcoin, is at this point a household name in the crypto space. Without Ethereum there is no DeFi ecosystem.
From a Sharia point of view, there is nothing wrong with buying and selling ETH and using the Ethereum network to make Sharia-compliant applications in the Web 3.0 world.
Of course, Riba should be avoided. It is important to note that not everything that is termed ‘interest’ would be Riba. For more information on that, refer to our staking article to get a better grip on this concept.
A good place to start dabbling in crypto as a Muslim is to read our Complete Crypto Guide for Muslims.