Technology
Defining Blockchain Technology
Traditional financial institutions are starting to adopt a disruptive technology called blockchain technology, which is slowly shifting the world from conventional centralised authorities to a decentralised user-defined platform.
Blockchain is a distributed network, meaning that the enlargement of the dataset is not possible without the agreement of everyone in the network. This means that the new block of information is added to the dataset only after a process of “mining” is applied. In this process, some of the nodes use the computing power of their CPUs to find a solution for a highly complex mathematical problem through which they confirm that the new block of information is consistent with the previous information stored in all previous blocks. By doing so, the new block is added to the existing ones in a way that it becomes impossible to tamper with the whole content of the dataset, referred to as immutability.
Due to these properties, Blockchain technology provides a way to secure the content of the data from loss and unilateral retroactive change.
Blockchain technology offers several advantages over conventional approaches, including:
Transparency: The transaction streams are open to public scrutiny.
Unchangeable and Immutable: The nature of blockchain technology ensures that transactions occur between parties in a verifiable and permanent way.
Truthfulness: The immutable aspect of the blockchain immediately inspires confidence and trust.
Security: The distributed ledger architecture of the technology makes it nearly invulnerable to modification of the data contained within it.
Efficiency: Transactions via blockchain eliminates intermediaries, allows peer-to-peer exchange between users and significantly reduces friction in the overall system.
Affordability: Multiple layers of bureaucracy—and their associated fees—are eliminated. Since there are no middlemen the entire process is more cost-efficient. One of the results is promoting inclusivity
Disruption: Blockchain is a revolutionary technology poised to disrupt conventional insurance and banking practices.
Instead of relying on paper-based agreements, traditional financial institutions are also adopting another disruptive technology called Smart Contracts, which are computer programs that help to facilitate the transfer of money and assets. Smart contracts are contractual eventualities embedded into hardware and software coding in such a way that it makes breach expensive. Utilizing the previously described characteristics of Blockchain technology, smart contracts are now understood as agreements with automated execution. Parties involved in such contractual relations agree ex-ante on a set of conditional statements that are coded in the smart contract. When these conditions are met, the agreed provisions are executed automatically.
Since a ledger is simply a record of transactions, Shariah compliance is a non-issue. The basic principle regarding the use of a new technology is of permissibility until evidence indicates that it is forbidden by Shariah.
Al-Hafiz Ibn Hajar said that the principle is that things are permissible until the Shariah says otherwise.
While blockchain technology is innocuous, the project and underlying transaction which the ledger records does need to be scrutinized by qualified scholars to determine whether it is Shariah-compliant or not. Scholars are unequivocal that each project should be analyzed against Shariah principles before participation.
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