Liquidity Incentives

Prepared by Dr Farrukh Habib

Incentives on Kamino Liquidity module

Certain liquidity pools on Kamino (such as the FDUSD/USDT pool) offer liquidity incentives funded by third parties. For example, the issuer of FDUSD, First Digital Labs, allocated a fixed reward of 3,300 FDUSD per week to be distributed among liquidity providers in this specific pool. This reward is not linked to trading activity or market-making fees but rather appears to be an independent incentive from the issuer. The distribution is proportional, i.e., a user providing 1% of the pool’s total liquidity receives 1% of the weekly reward. To summarise:

• The amount is fixed in total (e.g., 3.3k FDUSD per week)

• It is not dependent on actual DEX usage (i.e. volume)

• The distribution is proportional to each user’s share of the liquidity

Sh Farrukh's response:

After reviewing the structure regarding the FDUSD/USDT liquidity pool on Kamino, where First Digital Labs (the issuer of FDUSD) is offering a total of $500,000 in $FDUSD, distributed as a fixed weekly reward (e.g., 3.3k FDUSD per week), distributed proportionally to liquidity providers, I would like to share the following Shariah perspective:

1. Nature of the Reward: This incentive appears to be a third-party promotional reward — offered by the issuer of FDUSD — and not from Kamino or any centralized fund manager that guarantees returns. As such, this reward is best categorized under the principle of: هبة بشر ط (Hiba bi al-Sharth) – A conditional gift. In this case, the condition is providing liquidity using FDUSD in a designated pool, and the gift/reward is a share from the weekly fixed amount allocated by the issuer. There is no underlying loan, sale, or Riba-based transaction associated with this reward, nor is it tied to the performance of the liquidity pool or a guaranteed profit by Kamino. The reward is offered by the FDUSD issuer, a third party.

2. Role of the Investor and Platform: From a Shariah perspective:

   1. The liquidity provider (user) is acting as an investor in the pool.

   2. The Kamino platform or smart contract is functioning as the investment agent (Wakeel) facilitating the investment activity through market-making.

   3. Any fees generated from actual trades in the pool represent Shariah-compliant returns based on real economic activity (exchange-based fee income).

   4. The FDUSD promotional reward, although fixed in total amount, is distributed proportionally among liquidity providers, meaning:

      1. The actual amount a user receives depends on the size of their contribution and the total liquidity in the pool

      2. There is no fixed or pre-agreed return between the investor and Kamino

      3. The reward comes from a third-party, the issuer of FDUSD.

3. Shariah Ruling: Based on the above, this reward structure is permissible under Shariah, as it:

   1. Does not constitute Riba or a guaranteed return on investment by the investment agent

   2. Is a voluntary incentive from a third-party (FDUSD issuer) for promoting the use of its token

   3. Falls under the category of non-binding conditional gifting (hiba bi al-sharth)

   4. Is variable per user and not assured by the investment agent (Kamino)

Conclusion:

In summary, this type of reward does not violate Shariah principles and may be accepted as a permissible incentive. We may continue participating in such liquidity pools, provided that:

• The primary return remains fee-based income from real trading activity

• The promotional rewards do not evolve into binding contractual guarantees by the Kamino platform or fund manager.