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ESG Rating of Cardano (ADA)

Cardano belongs to the largest cryptocurrencies by market cap and is what we call a sustainable pioneer in the crypto universe. Read on to learn why.


Cardano is a proof-of-stake (PoS) blockchain with the long-term vision to enable economic empowerment for people in need. It differs from similar projects by taking a research-based approach. It was founded in 2015 by Charles Hoskinson, a Co-founder of Ethereum.


Environmental Score: A-

In GCR's ESG rating, Cardano receives a score of A- in the environmental category. The score is composed of data for the total electricity consumption of the network in annual terawatt hours (tWh), the electricity consumption for individual transactions with ADA in kilowatt hours (kWh) and the annual total of electronic waste in tons caused by the Cardano network.


Power consumption

A decisive factor in the environmental impact of a crypto asset is the power consumption. The proof-of-stake algorithm ensures that this is considerably lower for the Cardano network than for many blockchains of the older generation, which operate with proof-of-work consensus. According to GCR's calculations, Cardano's power consumption amounts to around 0.001 tWh per year.


According to our calculations, Cardano’s power consumption hovers around 0.03 kWh per transaction. In contrast, Bitcoin pours in 1300 kWh per transaction. While Ethereum's proof-of-stake data is not yet mature enough for comparison, first estimates show that the energy consumption per transaction is almost 40 times higher compared to Cardano. However, other proof-of-stake cryptos such as Solana (0.00091 kWh) or Tron (0.00003 kWh) outperform Cardano in this specific evaluation criterion, as they confirm significantly more transactions in a block in comparison and the energy savings are correspondingly greater.


Electronic Waste

E-waste is constantly increasing in the digital age. In the case of cryptocurrencies, the type of consensus algorithm plays a particularly important role. Since proof-of-work based blockchains such as Bitcoin or Dogecoin rely heavily on computing power to mine cryptocurrencies, the amount of electronic waste is disproportionately higher than in proof-of-stake based projects.


Often, proof-of-work algorithms use specific high-performance computers whose Central Processing Unit (CPU) does not have a long lifetime because it runs at the limit most of the time. Proof-of-stake is less energy-intensive and allows the use of regular "day-by-day" computers and other components that can be reused. GCR's e-waste calculations assume that most proof-of-stake CPUs live an average of 10 years longer than proof-of-work CPUs.


As a proof-of-stake project, Cardano therefore naturally generates a relatively small amount of e-waste. According to GCR's calculations, it amounts to a level of 0.3 tons per year.


Learn more about Cardano's key metrics, it's peer group and our key findings here.

Social Score: A-

In GCR's ESG rating, Cardano receives a score of A- in the social category. The score is composed of qualitative and quantitative data. GCR evaluates information on the social intention of the blockchain as well as figures on the average amount of transaction costs over 180 days in U.S. dollars. In addition, the rating association identifies and evaluates the distribution of assets within the network. To this end, GCR analyzes the percentage of addresses with more than ten percent ownership and addresses with more than one percent ownership.


Social intention

Essentially, the social category answers the question of whether Cardano empowers people economically and/or socially. This assessment is made along strict guidelines. While the social intention of the blockchain is a qualitative criteria, GCR rationalizes it in quantifiable terms for further calculations. To claim social intent, the blockchain must be able to demonstrate distinct use cases that are supported by trusted sources and whose data is transparently accessible. In the case of Cardano, there are several projects that are supported and pushed by IOHK, the engineering and research company behind the cryptocurrency. In the process, the blockchain is being used to provide access to financial services to a broad range of people in various African countries.


Cardano settles at a three on said scale. This classification testifies to a social intention in Cardano's vision and the fact that people with less money will gain an advantage from the solution or at least be treated equally - keywords here being entry barriers and transaction costs. Cardano is examined in the ESG Rating for questions on specific issues: Does it take a special computer to participate, or will a cell phone suffice? Are the transaction costs affordable for people from poorer backgrounds, or is active participation only possible for people with a certain basic income? Does the crypto asset support negative social effects such as illegal activities or money laundering?


Transaction Fees

Low transaction fees and an equitable distribution of the asset are crucial to ensure broad accessibility of a technology and prevent malicious behavior. Cardano is characterized by low transaction fees. At the last data check at the end of 2022, the network registered fees between 0.16 and 0.17 ADA per transaction. Converted, this corresponded to an average of about 20 to 40 cents. That is worlds ahead of Bitcoin (currently around 1.1 USD) and Ehtereum (currently around 3 USD), which recorded massively higher fees in the same period. However, there are various other cryptocurrencies whose fees are cheaper than Cardano, for example Tezos (2 cents) or Tron (7 cents). If we consider the historical data, Cardano shows itself to be relatively stable in terms of transaction costs. There have been no major outliers since the beginning of the measurements for the ESG rating.


Distribution of Assets

Cardano gets top marks for the fair distribution of its coins. In January 2023, only one wallet owned more than one percent of all ADA. The top ten holders own a little over six percent of all assets, and the largest wallet owns about 2.3 percent. Cardano plays in the upper league for this evaluation criterion. Bitcoin, Ethereum, Tezos, Avalanche and Cronos are other blockchain projects that demonstrate a similarly fair distribution of wealth.


Governance Score: A+

In GCR's ESG rating, Cardano receives a score of A+ in the governance category. The Governance category contains the most data points. GCR reviews the number of active miners or mining pools and determines how many are needed to take over 50 percent of the network.


Potential governance issues are analyzed within a binary framework. Here, for example, GCR analyzes potential conflicts of interest between the management respectively the controlling entity and the community and ADA owners and evaluates the impact of negative headlines.


Last but not least, network security has a big impact on the Governance Score. GCR checks how many days the project exists without experiencing security issues, how many developers are responsible for the network, and whether there are security and technology audits or bounty programs, among other things.


Network security

An important indication of the security of a blockchain is the distribution of miners or validators as in the case of Cardano. Groups of individuals joining together and becoming too large can quickly lead to an imbalance of power and trigger conflicts of interest.


In Bitcoin, the four largest mining pools currently share well above 50 % of all mined blocks. Theoretically, these pools could collectively take control of the network. This is highly unlikely, as it would probably lead to a crash in the Bitcoin price, which is not in the interests of the mining pools. Nevertheless, the example shows that with enough hashing power it is possible to attack the Bitcoin network even if the attacker does not own a single Bitcoin.


This is different with Cardano. In contrast to Bitcoin, Cardano has over 3,000 validators. To overtake the network the validators need to own/stake more than 50 percent of all ADA. It makes it very expensive and almost impossible to take control of the network by allying several staking pools. In comparison, this makes Cardano one of the blockchains with the best distributions, but it is still behind Polkadot, Solana, Tron, Avalanche, Vechain and Filecoin.


Cardano's decentralized network went live in September 2017, making it one of the oldest, largest, and most tested proof-of-stake algorithms. Since the launch of the main Cardano network, there have been no known incidents that have raised doubts about its security.


Conflicts of Interest

Like many other blockchains, Cardano has a foundation. Its main focus revolves around further developing Cardano ADA as a secure, transparent, and sustainable cryptocurrency. Unlike other comparable entities, the Cardano Foundation transparently discloses its mission, team members, and partners (EMURGO and IOHK). This reduces the risk of conflicts of interest and has a correspondingly positive effect on the ESG rating.


Cardano is not involved in any legal investigations at the time of this assessment and is not engaged in any frequent pump-and-dump scheme. There is also no above-average risk of money laundering compared to other cryptocurrencies. All of these aspects have a positive impact on the governance score.


Regulations

Cardano is considered Article 8 compliant. Article 8 of the Sustainable Finance Disclosure Regulation (SFDR) requires that financial products with environmental or social features must incorporate and declare sustainable risks and not cause significant harm.


Learn more about the impact of sustainable regulations such as SFDR or the EU taxonomy on cryptocurrencies and how we consider them in our ESG rating here:



Bottom Line: A Rating

In a direct comparison with 33 blockchains and over 50 tokens, Cardano performs very well in all three ESG dimensions and can even be considered "Best in Class" in the governance category. In line with GCR's strict assessment criteria, only five blockchains currently receive an A rating.


Cardano looks to a promising sustainable future. Currently, GCR rates the ESG Outlook as neutral, which means that no rating changes are likely in the medium term.


 

This blog was published free of charge in the first Cardano Impact Report in June 2023. The entire report can be purchased as an e-book on Amazon. The report was initiated and curated by Sustainable ADA.


Learn more about our rating methodolgy here: greencryptoresearch.com/methodology

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