Yield Farming with Crypto on Binance? | An Islamic Guide - IslamicFinanceGuru — Islamic Finance Guru (2024)

- Why should I care about yield in crypto?

- Yield farming vs crypto staking vs liquidity mining vs lending cryptocurrency

- What is halal for a Muslim?

- What is halal on Binance?

- What did I buy?

- Conclusions

As regular readers will know, Mohsin and I have been investing in cryptocurrency this year and we’ve been on a steep learning curve.

Historically we have simply bought coins and held, however recently we have been looking into earning a yield through crypto and have shared our practical guidance on the Islamic analysis we did as well as where we bought (and what we bought – for the little that that is worth).

We focus specifically on Binance as the crypto exchange – as that is where we do the majority of our trading. It also happens to be an exchange that is completely labyrinthine in its layout so we figured it’s actually helpful to guide people on that.

Why should I care about yield in crypto?

And crypto these days is offering serious annualised returns anywhere between 3-40% (and I’ve seen even as high as 90%). Of course, usually, the higher the annualised return the more speculative it is. But even at the lower end, those kind of returns are about 3-4x what the best mainstream savings accounts are offering (though of course they are much safer).

The numbers don’t lie

Let’s give some hard numbers to clarify things. Let’s assume you invest in Bitcoin. Over the last 4 years it has gone up 5x. Let’s assume it will continue to grow over the next 4 years to return 3x. If you invest £5000 at a 10% compounding return for 4 years, without any capital appreciation it returns around £7,500, and with capital appreciation you’re probably looking at closer to £20-25k.

Without any yield activity your return would be closer to £15k.

So that’s an improvement of 40-60% on the total return.

Long story short, if you’re investing in crypto for the long-term anyway, it is worth exploring the safer types of yield-generation, simply because it’ll add to your bottom line quite significantly.

What is yield farming vs crypto staking vs liquidity mining vs lending cryptocurrency?

We have covered staking more extensively here, but in a nutshell, you can earn a fixed yield on your cryptocurrencies through a variety of means. These include:

• Yield farming
• Liquidity mining
• Staking cryptocurrency
• Lending cryptocurrency

Unfortunately, the information on the internet is not as simple and clear as one would like, and usually there is no Islamic analysis on the question being discussed.

For people who do not care about sharia-compliance, items (1) to (4) are largely the same apart from the varying risk dynamics to each yielding strategy. For them, each strategy returns a fixed yield.

A note on definitions

This unfortunately means that other analysis online will lump things together or not dig into the level of granularity a Muslim requires to make a decision if an investment is haram or halal.

This therefore means that Muslims should be aware of the fact that there are no confirmed and fixed definitions of all these terms and even the largest crypto players can use them rather loosely.

So what is halal for a Muslim?

Let’s set aside the terms “yield farming”, “liquidity mining”, “staking” and “lending” and just look at how you will be remunerated as an investor:

1. Get money for being a broker

You get remunerated because you provide liquidity to an Automated Market Maker (“AMM”) such as Uniswap or Pancake. These are automated brokers (think AJ Bell, or Hargreaves Lansdown, but for crypto and completely automated so that the crypto protocol itself does the brokerage work without any need for human brokers).

2. Get money for being part of a PoS project

You get remunerated as you are part of Proof of Stake (“PoS”) crypto project and basically you just staking that coin enables you to be part of the mining of new coins – and that is how you earn (as you get a portion of the newly minted coin, for example).

3. Get money for lending your coins for interest

You get remunerated as you are lending your coins to a broker or exchange (such as Binance) who then use those coins to lend out to others and earn an interest rate – and then pass a portion of that interest back over to you.

Yield farming is typically associated with either (1) or (3).

Liquidity mining usually means (1) but can also mean (2).

Crypto staking usually means (1) or (2).

Crypto lending usually means (3).

As discussed in our staking article, and in our top 50 crypto analysis for Uniswap, our view is that (1) and (2) are generally permissible, while (3) generally is not.

The reason for the “generally” is that each crypto project can vary in its mechanics and crypto is a rapidly changing landscape, so it isn’t really possible to give a definitive answer at this stage.

What is halal on Binance?

Now we’ve cleared up what is generally halal, let’s now apply that to Binance.

You’ll find the following options available on Binance under their “finance” section:

1. Staking
2. Savings
3. Liquid Swap
4. Pool
5. Dual Investment
6. BNB Vault
7. 0
8. Crypto Loans

There are also the “Pay” and “Card” options but we won’t cover those here as they’re not ways to earn with Binance.