Ethereum is often praised as a more sustainable alternative to Bitcoin. But is that true? We have examined the number 2 in cryptos for ESG (Environment, Social, Governance) factors, considering the planned change from Proof-of-Work to Proof-of-Stake.
In line with our first report on Bitcoin, we took an in-depth look at Ethereum and assessed the blockchain according to our ESG scoring system. We answered three questions regarding Ethereum’s impact on the planet, social responsibility, and regulatory principles. Based on the answers, we calculated a score between A+ and D- for each ESG category.
Rating | Range | Assessment | Description |
A | A+ | A- | Sustainable | Can be held and traded without negative environmental or social impact within a governed framework. |
B | B+| B | B- | With potential | Low environmental and/or social impact with potential governance optimizations. Can be held and traded if there is no better alternative. |
C | C+| C | C- | Not there yet | Negative environmental and/or social impact expected with potential governance issues. Trading and holding are to be avoided if possible. |
D | D+ | D- | Not sustainable | Negative environmental and/or social impact with potential deficiencies in governance. Trading and holding are to be avoided altogether. |
The overall rating ("GCRS rating") is based on three individual ESG categories. An average score is calculated for each category. The overall rating corresponds to the worst ESG score so that failures in a single category cannot be compensated for by good scores in the other two. Thus, if a cryptocurrency is judged not to be environmentally sustainable, it cannot make up for the poor rating with adequate social standards or good governance.
Download the factsheet for free for the detailed rating of Ethereum:
Not (yet) green!
To get it out of the way upfront: From an overall sustainability perspective, Ethereum is preferable to Bitcoin, although not by much from an environmental perspective! Due to the proof-of-work approach and the associated power consumption per transaction, greenhouse gas emissions amount to 50 Mt (million tons) CO2 per year[1], which is roughly equivalent to the ecological footprint of Hungary.
In our analysis, we do not only consult quantifiable aspects; however, we also assess whether strategies to reduce the carbon footprint are known and, if so, how explicit they are.
Ethereum is aware of the environmental issues and has already developed first plans for optimizations in 2014. According to ethereum.org, several upgrades are expected to be introduced via the upcoming "Eth2 upgrades" in Q1/Q2 that will "improve Ethereum's scalability, security, and sustainability". These include the already launched Beacon Chain and its fusion with Ethereum Mainnet. This merger will signal the end of proof-of-work for Ethereum and eliminate the need for energy-intensive mining.
Ethereum has not yet communicated an explicit date for the switch, as “the upgrades have certain dependencies that determine when they will be deployed”. However, the adjustment of the mining method is considered certain. The rating in the ecological category thus improves from D to C.
Socially speaking, Bitcoin holds the lead
Ethereum offers its users the possibility to set up smart contracts, i.e., digital contracts that are structured according to an "if-then logic": An element of the contract comes into force when a predefined event occurs, without the contracting parties or a central authority having to take care of the processing. This allows administrative processes such as changes in the commercial register, land registry or notarizations to be automated.
By encoding and linking action and accountability in smart contracts, unfair business practices can be significantly minimized and contract security increased. The vision of Ethereum is thus inherently social, one could argue. Its construction as a decentralized platform also contributes to this because, unlike a bank account, anyone with a computer can access the blockchain. However, Ethereum scores lower for its high transaction costs of USD 5 on average. Although these are significantly below those of Bitcoin, they are still significantly higher than those of many blockchains and make the Etherum blockchain too expensive for large parts of the earth’s population. However, the switch to proof-of-stake should also result in a reduction of transaction costs.
Ethereum is pulling almost even with Bitcoin in the social space. The number two only lags in the distribution of assets. Although there are no super large holders owning more than 10 percent of the assets, seven large holders together own around 20 percent. Overall, Ethereum scores in the middle range in social sustainability, receiving a social rating of C+ (in contrast to Bitcoin with B-).
Rule-following model student
With a score of A, Ethereum scores high in governance, even better than Bitcoin in some nuances. There are more than 300k miners in well over 20 relevant mining pools, ensuring a balanced distribution of assets. To control the platform with an ownership of 50 or more percent, a total of two mining pools are required.
Conflicts of interest are addressed by the Ethereum Foundation. Similar to other crypto foundations, it is not a controlling body, but rather a sounding board. In contrast to the Bitcoin Foundation, it is more transparent and lists executive board members and a clear mission on its website.
Last but not least, there is the question of security. Here, too, Ethereum performs well. Since the platform was founded in 2015, no significant security vulnerabilities have become known.
In short: good intentions, not yet implemented
Ethereum enjoys a better environmental reputation than Bitcoin - currently unjustly, in our opinion. The higher score in our rating is due to the declaration of intent to switch from PoW to PoS. However, CO2 emissions are currently emitted almost as much. Let's hope that Ethereum puts its money where its mouth is - quickly.
[1] Ethereum Energy Consumption Index 2021: https://digiconomist.net/ethereum-energy-consumption
Please note that we regularly review and update our ratings. It is therefore possible that the scores mentioned in the blog post no longer correspond to the current rating. You can find an up-to-date overview of all ratings at any time at greencryptoresearch.com/ratings.
What is the GCR Sustainability Rating?
The GCR Sustainability Rating is the first ESG rating tailored to cryptocurrencies and adjusted accordingly. It reflects the holistic assessment of a cryptocurrency and is composed of three individual scores:
The GCR Sustainable Rating is a relative ranking, meaning that the best cryptocurrency in each category receives an A rating, while the worst receives a D rating. The overall rating ("GCRS rating") is based on three individual ESG categories. An average score is calculated for each category. The overall rating corresponds to the worst ESG score so that failures in a single category cannot be compensated for by good scores in the other two. Thus, if a cryptocurrency is judged not to be environmentally sustainable, it cannot make up for the poor rating with adequate social standards or good governance.