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Evaluating Ethereum's ESG Rating Post-Merge: Pathways to Improvement

Updated: Sep 4

A year has passed since Ethereum made the switch from proof-of-work to proof-of-stake, reducing its energy consumption by 99 percent. Ever since the cryptocurrency has maintained a B rating. But what's missing for it to climb to the top of the scoring scale? Let's have a look.


In September 2022, the crypto community turned its gaze to Ethereum. With the much-anticipated merge, Ethereum embarked on a momentous journey to adopt the proof-of-stake consensus mechanism, setting an important milestone in its development.


The transition garnered Ethereum widespread applause, accompanied by a noteworthy enhancement in its Environmental, Social, and Governance (ESG) rating, ascending from a former C to a commendable B grade. Nonetheless, in the time that has followed, the rating has plateaued without further progress. The reasons for that manifold.

Environmental analysis

Before the switch from PoW to PoS, Ethereum and Bitcoin consumed a similar amount of power of around 10 nuclear power plants each.


After the Merge, Ethereum's power consumption underwent a staggering reduction, plummeting by a factor of 300, as shown in the following graph.



Ethereum's prior power consumption, which stood at a remarkable 110 terawatt-hours (TWh), experienced a profound shift, now stabilizing at a comparably modest 0.4 TWh. To contextualize this adjustment, the power consumption equivalent to that of 10 nuclear power plants over a year has been curtailed to sustain a single nuclear power plant for a mere 12 days!


Ethereum also demonstrated significant environmental improvement in other areas: According to GCR's analysis, e-waste was reduced by 80 times - from 16,000 tons to 200 tons per year. And Ethereum's carbon footprint was reduced even more from 60,000,000 to 170,000 tons per year


Overall, Ethereum's environmental footprint has decreased by more than a factor of 100 after the Merge. Ethereum’s ESG rating was raised accordingly because of this massive improvement in environmental footprint. Still, it's not enough for an A rating. The primary underlying reason is the current count of validators within the Ethereum network – a pivotal aspect of the Proof-of-Stake (PoS) consensus mechanism.


Among the PoS-based blockchains, Ethereum is the most popular boasting an expansive network validated by over 750,000 computers. Other notable PoS blockchains like Binance Chain, Stellar, or Fantom operate with a significantly smaller number of validators, often numbering less than 100. All of them consume more than 1000 times less power than Ethereum.



Presently, strategic proposals are under consideration to redefine the validator threshold on the Ethereum network, proposing an increase from the current 32 Ether requirement to 2048 Ether. If granted, this would significantly reduce the number of validators and thus the power consumption as well as the electronic waste.


It remains to be seen how Ethereum's environmental impact will further develop. According to GCR’s assessment, Ethereum today complies with the Sustainable Finance Disclosure Regulation (SFDR) Article 6 and Article 8. The SFDR regulation aims to improve the transparency of sustainable investment products, prevent greenwashing, and increase the transparency of sustainability claims made by EU-regulated asset managers, financial advisers, and certain non-EU asset managers. Furthermore, Ethereum now meets the requirements of the EU Taxonomy and can thus no longer be considered a "red flag" investment.


Despite these significant improvements, Ethereum has not yet published a plan for when and how the blockchain will become climate-neutral. Other blockchains such as Polygon, Solana, NEAR, or Algorand are already more advanced in this area.


Social analysis

When looking at how a blockchain affects society, GCR analyzes the social or economic impact it has on people and whether it is easy to use for all. While Ethereum scores above average in the areas of "social impact" and "asset distribution", it presents a challenge in terms of transaction fees. At an average of more than US$7 per transaction, gas fees are a significant barrier to entry for many people, limiting their participation in the blockchain ecosystem. This results in a deduction in the social score of Ethereum’s ESG rating. Attaining an A rating hinges on Ethereum's ability to substantially slash transaction fees in the future.


Governance analysis

As the earliest smart contract blockchain, Ethereum undeniably boasts robust security. Within the blockchain landscape, Ethereum is uniquely positioned, supported by a substantial community of thousands of developers, signifying its notable innovative capacity. This community-driven approach ensures ongoing progress in both network development and security reinforcement.


The only drawback is Ethereum’s network diversification. GCR assesses how many validators are needed to get more than 50 percent to overtake the network. Currently, the four largest validators Lido, Coinbase, Stakefish, and Binance together own more than half and could theoretically take over the Ethereum network for a certain time. While the actual likelihood of this scenario is questionable, it does cast a slight shadow on network diversity. Taking these factors into account, Ethereum's governance rating stands at A-.

Bottom Line

In summary, Ethereum has achieved a significant transformation through the Merge. However, there are still areas where ESG risks could be optimized. The ongoing development is promising, particularly when considering the existing dependencies. It's worth noting that the positive impact of the merge extends beyond just Ethereum itself; various tokens built on the Ethereum blockchain have also witnessed substantial improvements in their ESG ratings.

 

About Green Crypto Research (GCR)

We assess the compliance of crypto assets with ESG standards and provide an estimation of the identified sustainability risks. Our ESG ratings are used by crypto exchanges, asset managers, and index providers to offer sustainable crypto solutions to their customers.





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