Islamic Finance Principles Assessment
Riba — Does Liquity involve interest?
Liquity's two versions sit on opposite sides of the riba question: V1 was explicitly interest-free, charging only one-time borrowing and redemption fees, while V2 (BOLD) runs on continuous, user-set interest rates on borrowed debt. This makes a single blanket verdict impossible, and Muslim investors must treat V1 and V2 exposure differently, with V2's interest mechanics being the more serious concern.
Assessment: Riba Dominant
Score: 40.2/100
Our methodology examines 10 criteria to evaluate how well Liquity avoids interest-based mechanisms.
Liquity's revenue comes from borrowing fees, redemption fees, and, since V2, ongoing interest charged to borrowers who mint BOLD against their collateral. V1's fee model — a one-off algorithmic charge rather than a recurring interest rate — sits closer to a permissible service fee. V2's continuous interest income, however, is structurally akin to conventional lending interest: borrowers pay a rate they set, and that rate flows through the protocol to stakers and incentive pools. Treasury composition beyond a community grants reserve is not detailed in available sources, leaving the presence of any interest-bearing treasury holdings unconfirmed.
LQTY staking rewards are variable, not fixed, and derive directly from real protocol activity: ETH/LUSD borrowing and redemption fees in V1, plus a share of interest revenue and voting rights over incentive allocation in V2. Variable, performance-linked rewards tied to genuine fee flows are more consistent with Islamic finance than a fixed guaranteed return. Yet because part of the V2 reward stream is explicitly funded by borrower-paid interest on BOLD debt, the underlying source of that portion of yield remains interest-derived, even though the payout mechanism to stakers is variable rather than fixed.
Gharar — How much uncertainty does Liquity involve?
Uncertainty in Liquity is moderated by a named team, open-source code, and extensive third-party audits, but increased by inconsistent public statements about governance and limited treasury disclosure. On balance the protocol is well-documented enough to reduce — though not eliminate — informational gharar for a careful investor.
Assessment: Moderate Gharar (Material Uncertainty)
Score: 64.9/100
Our methodology examines 15 criteria including team transparency, audit quality, and governance.
Liquity was founded by identifiable individuals — Robert Lauko and Rick Pardoe — with a broader named team (CEO Michael Svoboda, Head of Development Bingen Eguzkitza, and others) publicly listed with credentials and LinkedIn profiles. Code is open-source on GitHub, and the protocol publishes quarterly transparency reports covering TVL and peg stability. This is a materially different disclosure profile from anonymous or pseudonymous projects, and it substantially lowers the risk of hidden-party gharar, though treasury composition beyond a community grants reserve is not fully itemized in available sources.
Liquity has been reviewed by multiple named audit firms across several years: Trail of Bits (2020–2021), Coinspect (2021, 2024, 2025), ChainSecurity (2024–2025, including governance-specific review), Dedaub (2024), Certora (formal verification, 2024), and Recon (2024). Findings and resolutions are documented rather than hidden. This is a strong audit trail by DeFi standards. Remaining ambiguity concerns conflicting descriptions of LQTY's governance role (one source calls it non-governance, others describe stake-weighted voting), which investors should treat as an open disclosure gap rather than a resolved fact.
Maysir — Does Liquity involve gambling or speculation?
Liquity itself is not a betting or lottery mechanism; it is a collateralized borrowing protocol with a clear economic function. Speculative behavior can occur in secondary trading of LQTY, but that is true of any liquid token and is not determinative of the protocol's own design.
Assessment: Moderate Maysir (High Risk)
Score: 56.5/100
Our methodology examines 11 criteria to determine whether Liquity is a gambling instrument or a genuine economic tool.
Liquity's core function — allowing users to lock ETH or liquid-staking tokens as collateral to mint a dollar-pegged stablecoin — is a genuine credit/liquidity utility, not a wagering mechanism. Borrowers use it for liquidity access, traders and DAOs use LUSD/BOLD for settlement, and stakers earn from real fee and interest flows tied to protocol usage rather than from a chance-based payout. This productive, collateral-backed structure distinguishes Liquity from maysir-type instruments where value transfer depends purely on chance rather than an underlying economic service.
Liquity has multi-year operating history, exchange listings including Binance, and demonstrable TVL and stablecoin peg performance (~$1.02), reflecting real adoption rather than pure speculative churn. At the same time, LQTY as a freely traded token can attract short-term speculative trading on exchanges, as most liquid crypto assets do. This secondary-market behavior is a feature of trading venues generally, not of Liquity's protocol design, and per the framework applied here should not be read as evidence that the coin itself is a gambling instrument.
The Full 27-Point Screening
1. Legitimacy (4 criteria)
| Criterion | Score | Analysis |
|---|
| Team Transparency | 88/100 | Founders and core team are named with verifiable credentials (Ph.D. Law, Physics/Economics degrees) and public profiles across multiple sources. |
| Fraud & Scam Risk | 78/100 | Multi-year operating history, audits, and exchange listings show no fraud, hack, or rug-pull indicators against Liquity itself in these sources. |
| Use Case Legitimacy | 82/100 | Sources describe concrete real-world use cases (collateralized borrowing, stability pool yield, leverage, cross-chain liquidity) beyond speculation. |
| Ethical Practices | 70/100 | The protocol's own design is a collateralized lending/stablecoin system, not built for gambling or another prohibited industry, though its own interest mechanics raise separate concerns addressed under C16. |
Summary: Liquity is run by a named, credentialed team with a multi-year public track record and no fraud or hack indicators found in these sources.
2. Project Operations (9 criteria)
| Criterion | Score | Analysis |
|---|
| Core Protocol Business | 65/100 | Core protocol business is decentralized ETH-collateralized borrowing and stablecoin issuance, a legitimate financial sector, though V2's interest-based lending is a structural concern tracked separately. |
| Transaction Fees | 50/100 | V1 fees are one-time and algorithmically set with no ongoing charge, but V2 explicitly adds continuous borrower-paid interest, mixing fair fee design with an interest component. |
| Treasury Assets | 0/100 (low evidence) | Sources mention a Community Reserve/endowment but give no detail on what assets the treasury actually holds, so interest-bearing exposure cannot be assessed. |
| Revenue Model | 30/100 | Sources explicitly state V2 is designed to "earn a variable interest revenue" from borrower interest payments, making interest income part of the revenue model. |
| Transparency | 88/100 | Code is open-source on GitHub, with public whitepapers, docs, and audit reports. |
| Governance | 68/100 | V1 is described as governance-free and immutable; V2 adds a staking-weighted voting system for directing incentive allocation, giving moderate decentralised governance. |
| Launch Fairness | 32/100 | Genesis allocation gave roughly 57.6% of supply to team and private investors (with lockups/vesting), which is not a broadly fair public launch. |
| Token Distribution | 35/100 | Detailed allocation tables show a majority of tokens went to insiders/investors versus community, despite long vesting schedules. |
| Speculation/Utility Ratio | 62/100 | LQTY has a genuine fee-capture/governance function tied to real protocol usage, but active exchange trading volume also indicates a speculative market. |
Summary: The protocol is a decentralized ETH-collateralized borrowing system that evolved from interest-free loans (V1) to user-set continuous interest (V2), with open-source code but a heavily insider-weighted initial token allocation.
3. Financial Health (4 criteria)
| Criterion | Score | Analysis |
|---|
| Protocol Revenue | 30/100 | Revenue explicitly includes borrower-paid interest in V2, alongside one-time fees, making part of protocol revenue interest-based. |
| Financial Status | 68/100 | Quarterly reports document TVL growth, exchange listings, and stablecoin peg stability, indicating reasonably transparent financial standing. |
| Interest Assessment | 20/100 | The current V2 protocol explicitly charges ongoing, user-set interest on borrowed BOLD, which is direct interest-based lending at the protocol level. |
| Audit Quality | 90/100 | Multiple named, reputable firms (Trail of Bits, Coinspect, ChainSecurity, Dedaub, Certora, Recon) audited the protocol across 2020-2025 with published findings and resolutions. |
Summary: Liquity shows real market traction and extensive, named third-party audits, but its native lending function now explicitly generates interest-based revenue in its current V2 form.
4. Token Economics (5 criteria)
| Criterion | Score | Analysis |
|---|
| Token Purpose | 78/100 | LQTY has a defined utility as a fee-capture and incentive-direction token, not a meme asset. |
| Governance Rights | 55/100 | Sources conflict — one states LQTY "is not a governance token" while others describe stake-weighted voting over incentive allocation, leaving governance rights unclear. |
| Rewards Distribution | 72/100 | Staking rewards are explicitly variable, driven by protocol fee and interest volume rather than a fixed payout. |
| Speculation Controls | 42/100 | Only insider lockups/vesting schedules function as anti-speculation controls; no broader market anti-speculation mechanism is described. |
| Asset Backing | 50/100 | LQTY is not asset-backed but represents a claim on protocol fee/interest revenue and incentive-direction rights, inferred rather than explicitly stated as "backing." |
Summary: LQTY is a genuine utility/fee-capture token with variable, usage-based rewards, though its governance rights are described inconsistently across sources and it carries no hard asset backing.
5. Staking Mechanism (5 criteria)
| Criterion | Score | Analysis |
|---|
| Mechanism Type | 85/100 | Staking is non-custodial, on-chain, with no lock-up and no slashing, clearly documented across multiple sources. |
| Islamic Contract Classification | 30/100 | The staking reward stream is explicitly funded in part by borrower-paid interest revenue (V2), making a clean Mudarabah/Wakalah classification unresolved. |
| Rewards Structure | 55/100 | Rewards are variable and tied to real protocol activity, but a meaningful portion of that activity is interest income rather than pure fee-for-service revenue. |
| Documentation | 85/100 | Staking mechanics, fee flows, and reward sources are thoroughly documented in official docs and blog posts. |
| Shariah Alignment | 25/100 | The core protocol's shift to explicit, ongoing borrower interest in V2 leaves a decisive, unresolved Shariah question over the staking reward stream's underlying source. |
Summary: LQTY offers non-custodial, flexible native staking with well-documented mechanics, but part of its reward stream is fed by borrower interest payments, leaving its Islamic contract classification unresolved.
Overall Assessment: Liquity is a transparent, well-audited, and genuinely utility-driven DeFi protocol, but its V2 shift to explicit borrower-paid interest introduces a significant unresolved Shariah concern at the core protocol and staking-reward level.
Written by ThanvirFounder, Ex Director S&P Global Energy
Reviewed by Imam Omar SiddiqiShariah Scholar