Proposing a block

Explains how block proposal works, the potential shariah issues and our scholarly analysis of it.

Staking is providing your capital to the blockchain to secure it. In return you earn profits from running the blockchain.

The blockchain "running" mainly has 2 steps that are relevant to stakers: first a block is proposed, and second, the block is attested.

We'll talk about proposal here and the potential shari'i issues here.

Block Proposal in Ethereum

In Ethereum, a validator participates in two primary activities: block proposal and attesting. Here's how block proposal works:

1. Selection: A validator is randomly selected to propose a new block at the start of each slot (~12 seconds). To be selected

2. Block Assembly: The selected validator assembles the block by:

   • Collecting transactions from the transaction pool.

   • Ensuring transactions are valid and adhere to protocol rules.

   • Including a reference to the chain's current state.

3. Proposal: The validator then proposes the assembled block to the network.

4. Propagation: Once proposed, the block is propagated across the network for other validators to verify and attest to its validity.

How Ethereum Validators Earn Money from Block Proposals

Ethereum validators can earn income through block proposals primarily via two methods:

1. Priority Fees: When validators propose a new block, they receive the priority fees or "tips" included in each transaction within the block. These fees are paid by users to incentivize validators to include their transactions promptly.

2. Maximum Extractable Value (MEV): MEV refers to the additional profit that a validator can earn by optimally ordering, including, or excluding transactions within the block. Validators can capitalize on MEV by executing certain strategies, such as front-running or back-running transactions to maximize returns. However, ethical considerations and network rules apply to minimize negative impacts on the fairness and security of the blockchain.

Important Note: Usually, the validator relies on another party or parties (the “builder”) to select the transactions from the mempool. The builder is responsible for optimizing the transaction order to maximize both priority fees and MEV earnings, which are then shared with the validator. Sometimes validators have an explicit partnership with builders, agreeing on specific terms for profit-sharing. In other instances, their partnership occurs through an open marketplace like Flashbots, where builders competitively bid to propose blocks to validators.

Borrowed from Blocknative. There are actually a LOT of services involved before a block is proposed.

Two Potential Issues in Block Proposal

There are few issues in block proposal that could conflict with Islamic principles:

1. Priority fees: these fees could come from near unanimously haram transactions including lending with interest, leverage trading and gambling

2. MEV (Maximum Extractable Value)

MEV has many instantiations. Sometimes parties who are processing the transaction frontrun user transactions to make money. However thanks to services like Flashbots many MEV operations are now friendly too. Essentially, they help the user order their transaction in a way that saves them money.

We won't look at the shari'i analysis of MEV for now as it's a complex topic and still under research.

A Shari'i Analysis of Priority Fees & Earning from Haram

Priority fees are prime source of income for validators and stakers.

[Insert some analysis]

However anywhere from 5-20% of these priority fees can come from haram sources.

[Insert analysis from Dune.]

When you stake with a staking service, you form a mudārabah (aka qirād) partnership with the validator. In this relationship, you are the capital provider (rabb ul-māl) and the staking service is the worker (āmil). You and the staking service agree to split the profits according to a pre-determined rate.

Therefore, some percentage of your share of the profits from this relationship are coming from haram sources.

The Hadith

The Prophet ﷺ said a “A body nourished on Haram sustenance (rizq) will not enter paradise.”

In this and similar hadiths there is a general warning against consuming anything that comes from haram.

However the ulema have differed on the precise application of this and similar hadiths.

The Hanafi Understanding of Hadith Literature

Since the amount of money earned through haram is small (less than 5%), it is permissible but suboptimal to use normal staking. However, since there is a purified version of the staking (for example but not exclusively restricted to Goldsand) available it is preferred to use a purified version of staking.

In classical books of fiqh like the Dhakirah, the opinion of the sahibayn is that

Ibn Abidīn mentions in his hāshiyah that

Note: What about the Hanafi opinion that permits ribā'?

There is a Hanafi opinion that permits ribā' in dār ul-harb. However this requires careful consideration when it comes to the crypto and this Ethereum staking context because Muslim, non-Muslim, dar ul-harb and dar ul-islām money are all mixed together.

Opinions could differ on this issue amongst Hanafi ulema even if one where to take this Hanafi opinion but the safer option considering how mixed (Muslim, non-Muslim, dar ul-harb and dar ul-islām) the capital flow is in Ethereum staking is to avoid relying on this opinion here.

The Maliki Understanding of Hadith Literature