Smart Contracts and the Possibility of Gharar

Abstract

Deriving from the rapidly evolving blockchain technology, smart contracts—self-executing contracts with terms and conditions embedded in code—present both opportunities and challenges for the world of finance. While these digital contracts promise efficiency and transparency, the study of their compatibility with the Shariah perspective remains a significant and largely unexplored area. This research was done by understanding the foundations of Islamic Finance and fundamentals of Smart Contracts from articles and other references to explore the potential avenues and challenges of integrating smart contracts within Shariah-compliant financial practices and to ascertain whether the characteristics and mechanics of smart contracts can align with the ethical, transparent, and fair mandates of Islamic finance or if they introduce elements of Gharar (uncertainty/ambiguity), potentially violating these principles. This paper finds that there are 4 common factors between Islamic Finance and Smart Contracts while there are 5 areas where they might be discordant which then may introduce Gharar. This paper also simulates scenarios to analyze possible Gharar introductions and offers ways how to mitigate these.