Takasure: Takaful as a DAO

Blockchain from a Shariah perspective

Web3, blockchain, cryptocurrencies, DeFi, NFTs, DAOs are all technologies that are evolving rapidly. Islamic scholars, like government regulators, are having a hard time catching up. It is clear to scholars that the distributed ledger technology, aka the blockchain, in and of itself is neutral and is not objectionable from a shariah perspective. In fact, the distributed nature of the blockchain has been compared to the preservation of the Quran, the nodes in a network being the memorizers of Quran. For someone to claim that a single verse of the Quran is incorrect would mean challenging the memory of many millions of people who have memorized the Quran. Similarly, to change anything on the blockchain would require 51% consensus of all the nodes.

While blockchain technology is innocuous, the same cannot be said about the various projects that run on the blockchain. Scholars are unequivocal that each project should be analyzed against shariah principles before participation.

For those building on the blockchain, the same prohibitive nature of the shariah applies, anything that is not specifically prohibited is allowed. This means that there should be a careful and deliberate focus on avoiding the impermissible to stay shariah compliant. This is the approach by which TAKADAO is built.

TAKADAO is built on a number of blockchain technologies that require consideration.

• Decentralized Autonomous Organizations (DAOs)

• Cryptocurrencies and stablecoins

• Tokenization and NFTs

• Smart contracts and oracles

The DAO in TAKADAO stands for Decentralized Autonomous Organization. Essentially, it’s a group of people coming together for a specific purpose. To do this in the off-chain world, people would incorporate a legal entity (a company) with a set of bylaws enforced through a nation’s courts. A DAO on the blockchain is organized by smart contracts, computer code that is immutable and ensures that whatever needs to happen, happens. Smart contracts are both the bylaws and the enforcers of the bylaws.

To represent membership and ownership of the DAO, DAO tokens are issued. Suppose the DAO is financial in nature, participants would contribute cryptocurrencies such as stablecoins to the DAO and receive DAO tokens in exchange. The type of cryptocurrency accepted and how many tokens will be issued by the DAO are determined at the time of DAO creation and coded into smart contracts.

Smart contracts control and regulate the behavior of the DAO, including how financial assets are managed. In most cases, what action a smart contract takes requires additional information that may be dynamic in nature and require constant update. In such cases, data oracles are called upon by the smart contracts to provide this information. Oracles can be machine or human and their impact on the smart contract is limited to the data they provide.

Assets on the blockchain are either fungible (many identical units) or non-fungible (one unique item). Fungible tokens (like DAO tokens or bitcoin) are indistinguishable from one another, while Non-fungible Tokens (NFTs) are unique and no more than one of each exists. NFTs are a useful way to bring physical real world assets on-chain and can be locked into smart contracts.

The above technologies form the basis of Takasure, none of which are inherently prohibited by shariah. Of course, that alone does not make Takasure shariah-compliant, what Takasure does also requires further examination, which will be covered in the rest of this paper.

Addressing the problems of Takaful today: Blockchain to the rescue

To address the challenges faced by the takaful industry, we propose the adoption of the blockchain and cryptocurrencies as the solution.

Today, people in non-Muslim countries as well as in many Muslim countries don’t have access to conventional insurance, let alone takaful products. Considering that takaful is community-based mutual insurance, why this is the case is not clear to us. People should be able to come together and contribute to a takaful fund that is professionally managed. Organizing as a DAO allows this to happen.

We talked about the law of large numbers to reduce individual participants’ risk; what better way to do this than to gather a global community contributing to a takaful DAO fund? Furthermore, the DAO is far superior than a real world company in that it is governed by auditable smart contracts that cannot be changed by any one person. This allows a “trustless” entity, one that doesn’t require a centralized authority like national courts or police to enforce. Smart contracts are computer code that don’t have biases or fears and don’t make decisions based on emotions.

Accepting takaful contributions via cryptocurrencies eliminates the high costs of moving fiat money across borders; for many people in countries with highly inflationary currencies, cryptocurrencies also help keep takaful contributions, and more importantly the takaful benefit, regular and predictable. How much is a life insurance benefit really worth if the payout currency is depreciating 10-20% a year? By the time your beneficiaries receive a payout in fiat currency, that amount may be worth the same or less than just keeping the premiums in cash to begin with.

The public nature of the blockchain is a boon for regulators who now have “externally audited” financial transaction data at their disposal at all times. The blockchain forms the third leg in “triple entry” accounting, . Furthermore, underwriting and treasury management strategies are all easily auditable through smart contract “audits”; for example, a simple read through of a smart contract will reveal the variables that impact claims and how claims processing is executed. Needless to say, this is easy on regulators and great for consumer trust.

The issuance of DAO tokens to participants is yet another unparalleled innovation in takaful fund management. Recall that the takaful fund is ultimately owned by the contributors to the fund. You can compare this to a company with investors. Traditionally, keeping track of investors through cap table management is a job in itself involving spreadsheets and a lot of paperwork. This is compounded in a takaful fund when contributors are moving in and out of the fund regularly according to insurance contract validity dates. The issuance of DAO tokens streamlines this process as tokens represent ownership in the takaful fund and are digitally tracked on the blockchain, reducing human error and fraud.

The DAO token allows for yet another important function currently absent in takaful: community governance. Tokens represent ownership as well as voting power. DAO participants can now vote in a fair and transparent manner on key issues in takaful fund management, such as the selection of the takaful operator or treasury manager.

A lack of appropriately trained talent is no longer an impediment now that a globally distributed workforce is available for web3 companies. COVID has not only shown that remote work is possible, it also is associated with productivity increases. In any event, a globally distributed team is necessary for a project that requires appropriately trained workers difficult to gather in a single locale.

It is our goal to apply a technology-first approach to building insurance products of the future. Building takaful as a DAO is just the first step that unlocks product innovation and advancement in an industry that rarely even tries. The very premise of a decentralized, global, insurance fund is in and of itself innovative and presumes to de-risk through scale, resulting in better outcomes for all parties involved. And yet, there will surely be more innovation and unlocks ahead.