While our approach to the sustainability rating of Coins and Tokens is congruent, the data points measured differ in some respects. Read on to understand how we assess tokens.
Before we dive into the ESG assessment of tokens, let's take a quick look at the terminology. The terms coins and tokens are often mistakenly used as synonyms. They are indeed congruent in many respects, but not across the board. The biggest difference, and the one that is most important for our ESG rating, is that coins are native to their own blockchains. When coins such as Bitcoins are traded, they cannot be moved to another blockchain. Furthermore, every transaction is recorded on the blockchain.
Theoretically, coins can be divided into yet another subgroup. So-called Altcoins are based on the original source code of the Bitcoin blockchain but were modified during development. These include Ethereum or Litecoin, for example. While this may have an impact on the results in the ESG rating (depending on the modifications made), it does not affect the actual evaluation methodology.
Meanwhile, a token is a cryptocurrency built on an existing blockchain. It has a broader functionality than coins and relies on smart contracts for trade. It may be used as a currency in a payment system, as a means of payment for access to a platform or community, or even as a share certificate in certain start-ups. Basically, a token is a digital asset that denotes the right to something.
Now that we've sorted that out, let's get started.
We rate all cryptocurrencies according to the three ESG (environment, social, and governance) dimensions, similar to industry standards such as stocks. For each rating category, we collect large amounts of data that form the basis for our quantitative estimation models as well as for qualitative expert judgment. The latter ensures that soft factors such as visions, roadmaps, or conflicts of interest are taken into account and included in the rating.
We source between 90 to 110 data points per token and feed our data model with the required pieces of information. Whenever possible, the data flow is automated and thus up to date. Before we publish a rating, our research experts double-check all ratings, critically scrutinize them, and adjust them if necessary. All ratings are reviewed regularly at intervals of at least six months.
We use similar, in cases identical criteria for the assessment of coins and tokens. You can find a good overview of the valuation mechanics of Coins in our related blog post: How we rate native cryptocurrencies - a user guide. However, the sustainability analysis of tokens is more complicated for the reason mentioned at the beginning: tokens may run on various blockchains and each one has an impact on the scoring in the environmental category.
The impact of underlying Blockchains: USDT vs. EURT
My favorite examples to illustrate the impact are the "sister tokens" Tether USDT and Tether EURT. At first, you would probably assume that the two received the same rating. Sorry to disappoint, but they did not. While USDT achieves a score of A- in the environmental category, EURT only scores a C+. They also diverge on social and governance scores. This is because of the underlying blockchains.
EURT currently runs exclusively on the Ethereum blockchain, which scores rather poorly in the environmental category with a C score (see our blog on the GCR Sustainability Rating of Ethereum). Meanwhile, USDT's trading volume on Ethereum features only about 7 percent, with most transactions being conducted on Tron. Tron achieves an excellent environmental score of A+ in our rating. This has a correspondingly positive effect on USDT's rating.
We are often asked how transaction volume affects valuation. First off, we only include the ESG rating of any blockchain when the volume of all token transactions reaches more than one percent. Secondly, we count the ESG rating of the underlying native blockchain as one-third and the standalone ESG rating of the token as two-thirds. Finally, we also evaluate bridged tokens on other chains.
The GCR Sustainability Rating is based on a relative scoring system. We evaluate the ESG dimensions of each cryptocurrency in direct comparison to its peers.
Bear in mind that our rating system is relative, i.e. we evaluate the sustainability of tokens in direct comparison. In other words, we ask ourselves which cryptocurrency is more sustainable considering a similar market cap and transaction volume. This is to ensure that tokens with higher transaction volumes and associated higher CO2 emissions are not automatically penalized. Instead, we focus on energy consumption per transaction. That is why it is possible that a token like USDT shows a higher CO2 emission than EURT but is still considered more environmentally friendly.
In addition to our quantitative assessment, we also examine qualitative data points in a binary system and analyze, for example, whether there are opportunities for users to switch to a sustainable blockchain and trade the token in an eco-friendly way.
Qualitative factors are particularly prominent in the social and governance categories. Here, we ask qualitative questions in a binary framework such as:
Does the token empower people economically or socially?
Is there consumer financial protection?
Are there legal or regulatory issues?
Is the legal entity and domicile disclosed?
Are the interests of the owners preserved?
Is there a lack of proper and regular audits?
The underlying blockchain has an impact on the valuation of a token and leads us to use a separate ESG framework. Consequently, a token cannot be assessed without knowing the sustainability scores of the underlying blockchain. This makes the sustainability assessment of tokens much more challenging compared to the assessment of native coins.
Finally, here are some data points of different tokens in comparison, which we calculate to determine the environmental score:
Tons CO2 Emissions YoY
Power consumption per transaction in kWh
Underlying blockchain most traded on
GCR Sustainability Rating
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.