Ethereum’s ESP assets can boost the ETF’s success.

After several years of rejected applications, the United States Securities and Exchange Commission approved Bitcoin Exchange Traded Fund (ETF) applications on January 10.

Since its launch, billions of dollars have poured into the new Bitcoin (BTC) ETFs.

SEC approval Many are eagerly anticipating the arrival of Spot Ether (ETH) ETFs, coming in seven final approval periods between May and August.

Like Bitcoin, the Space Ether ETF is expected to be a bridge between traditional investors and the crypto markets.

Previously, institutional investors had no way to gain exposure to the crypto markets except through proxies such as microstrategy stocks. With an ETF, institutional investors have an SEC-approved, regulated fund in which to invest.

Institutional interest in cryptocurrencies has been on the rise since its inception.

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Manuel Villegas, digital assets specialist at private bank Julius Baer, ​​told Cointelegraph that “there has been a clear increase in interest in many financial institutions.”

Alongside this growing institutional acceptance of cryptocurrencies is an increasing focus on the environmental, social and governance (ESG) attributes of investments. Organizations have committed billions of dollars to ESG investments, particularly in recent years.

Could Ether ETFs identify interest in ETH due to its favorable ESG properties?

Christian Stoll, co-founder of the Crypto Carbon Ratings Institute (CCRI), told Cointelegraph:

Ethereum's positive performance in relation to ESG considerations […] It could make ESG and digital asset exposure more attractive to institutions actively looking at it.

“In that,” Stoll said [ESG] In the asset class, the ESG benchmark shows Ethereum's outperformance against other crypto assets. On top of that, the Spot Ether ETF could establish ETH as the only ESG-compliant crypto asset in the US market.

What is ESG investing and why is it important for Ethereum?

With climate change escalating, major investors are being increasingly scrutinized about where they put their money.

In an effort to create sustainable financial networks, a group of banks and other investment organizations – at the invitation of the United Nations – summarized the critical issues and popularized the term ESG in a 2004 report titled “Who Thinks Wins”.

ESG investing refers to the set of criteria that socially conscious investors use to screen potential investments in a company's behavior.

As Larry Fink, CEO of $10 trillion asset manager BlackRock, wrote in his 2022 letter to CEOs, the potential for new ESG-compliant projects is huge.

“The next 1,000 unicorns will not be search engine or social media companies, they will be sustainable, scalable innovations – startups that help the world decarbonize and make the energy transition affordable for all consumers.

For 2024, Thomson Reuters Institute ESG strategist Natalie Runyon predicts that ESG will move from being a peripheral to a core aspect of corporate business strategies. In the year By 2025, global ESG assets are expected to reach $53 trillion.

If Ether is widely adopted as an ESG asset, it may take up part of this investment branch. The SpotEther ETF positions ETH as the only ESG cryptocurrency, an SEC-approved financial instrument.

Ether matters as an ESG asset

Crypto data firm CCData and CCRI created an institutional-grade scoring system that assesses the ESG characteristics of digital assets.

The data puts Ether at the top, followed by Solana (SOL) and Polkadot (DOT).

Area

The peak of Ether's potential for ESG can be attributed primarily to Ethereum – the network that supports the asset – switching from a power-intensive Proof-of-Work (PoW) protocol to a more energy-efficient Proof-of-Stake (PoS). .

The network made a change on September 15, 2022, cutting power consumption significantly.

Mohammad Alkaf Alhashmi, co-founder of Islamic Coin and Halal Akbari of POS blockchain HAQQ, told Cointelegraph:

“Ethereum's transition to a proof-of-stake model will greatly increase its appeal to ESG-active investors. This move to a more energy-efficient consensus mechanism aligns Ethereum with the growing demand for sustainable investment options.

The CCRI Benchmark Report from July 2023 highlights this environmental trend, noting that “the variation in electricity consumption rates is still striking.”

While Bitcoin mining sustainability has reached a new all-time high, the difference between PoW and PoS is undeniable. According to CCRI, PoS protocols “can consume 10,000 times less electricity than Bitcoin.”

The comparison between both verification protocols is reflected in CCRI's Carbon Levels Index, which shows how much lower CO2 emissions and electricity consumption are compared to ETH and its Ethereum blockchain, such as Litecoin (LTC) or Bitcoin Cash (BCH). .

As a CCRI spokesperson explained to Cointelegraph, PoS emissions and energy consumption don't just come from transactions: “Node count and hardware requirements are key drivers of overall network emissions.

In Solana's case, “the main driver [of emissions] It's high hardware requirements,” whereas with Ethereum, it's “the size of the network represented by the number of validator nodes.” Both have almost the same environmental ratings, but the Ethereum blockchain has higher adoption and usage.

Although PoS has dramatically reduced electricity consumption and CO2 emissions, there is still room for improvement. The September 2023 study, “Post-Merger Carbon Footprint Analysis and Sustainability in the NFT Art Market,” compares Ethereum's blockchain footprint with that of digital payment service MasterCard, as of February 1, 2023, and concludes:

“A single Ethereum transaction results in an energy footprint of 0.04 kWh and emits 0.02 kg of CO2. On the other hand, MasterCard's digital transaction system […] 0.0007 KW per transaction. He just eats,” he said.

Ophelia Snyder, co-founder and president of 21.co – a sponsor and subsidiary of the ARK Invest Spot Ether ETF – told Cointelegraph that investors and mainstream media only think about the “E” in ESG analysis.

“People always forget the S&G part, which is unfortunate because it's really important.”

Social

The “S” in ESG stands for the social component of an investment—that is, the relationship a company can have with its workforce, the communities in which it operates, and its political environment.

For Snyder, the social dimension should focus on “financial empowerment, freedom and inclusion – including underrepresented groups and financial infrastructure.” In her opinion, Ethereum has responded to some of these values.

The ESG Benchmark measures these social values ​​by focusing its analysis on the security, accessibility and community of each blockchain.

CCRI writes that security is a top priority for the blockchain industry, “validated by the implementation of bug bounty programs in 80% of projects.”

In addition, this focus is aligned with ESG principles to protect customer funds, emphasizing responsible and secure practices that ensure the long-term integrity and honesty of the industry's blockchain ecosystem.

One of the areas where Ethereum and the industry need to improve is to reduce transaction costs and provide a more inclusive entry for all types of users.

CCRI's July 2023 report highlights the “effectiveness of Layer2 solutions to address this problem,” but notes that “widespread adoption appears to be slowly improving as transactions on Layer 1 blockchains increase.”

One key factor to improve is the pooling of resources and power between blockchain protocols. “The unequal distribution of protocol tokens severely undermines equity in the industry and poses significant risks to consolidation,” the report said.

When asked about the decentralization risks posed by the shift from Ethereum to PoS, CCDita's head of research, Joshua de Vos, told Cointelegraph.

“Ethereum is one of the top performers in the distribution of tokens among major wallets. By design, proof-of-stake and liquid staking protocols allow a large number of individuals to participate in securing the underlying blockchain.”

Management

Governance in the blockchain community can be the ultimate proof of a healthy ecosystem.

“Decentralization and transparency are a big part of how you think about good governance,” said Snyder, who are core principles of the blockchain industry.

She described aspects such as “loving from home, participating in community intersections, and participating in EIP proposals.” Thanks to this function, the Ethereum network is at its peak.

However, many blockchains lack an engaged community. There are countless examples of decentralized autonomous organizations that depended on administrative interaction and failed due to inactivity.

According to the CCRI report, only 15% of the cryptocurrencies studied had “an average voter turnout greater than 50%,” indicating a low turnout rate.

CCRI uses Nakamoto's coefficient, which measures the decentralization of a blockchain network by calculating the minimum number of nodes/verifiers needed to damage the network or launch a 51% attack.

A smaller number of addresses has a significant supply of tokens, so networks with a higher size coefficient are decentralized, while a lower number represents more centralization.

The report concludes that there is a general lack of “decentralization”, as only 22.5% of the studied cryptocurrencies have a Nakamoto coefficient of more than 50.

In particular, 55% of blockchains with a high Nakamoto Coefficient used PoW, which shows the difference between both consensus mechanisms in terms of decentralization.

For ESG ratings, this is an important metric, as “decentralization brings benefits that can offset climate impacts,” a CCRI spokesperson told Cointelegraph.

Ethereum is in second place, with Polkadot leading the pack thanks to its share consensus mechanism.

Solana is not in the top five, because a significant measure is the rating “based on the historical management activity in terms of ideas and updates implemented by each chain,” Ciccita de Vos told Cointelegraph.

Simply put, Ethereum has a longer history than Solana; Therefore, it has a great advantage in this area.

Ether ETF may revive interest in ESG.

While companies make big claims about their ESG goals, ESG markets are suffering from an identity crisis and are outsourced by market conditions.

“Greenwashing” — that is, misrepresenting one's ESG commitment through a politically charged platform — has turned ESG into a “weaponized” term, Blackrock finks.

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Finally, investors follow the money, which can be a major problem for ESG markets. In the United States, inflows into ESG-branded funds have declined amid weak performance.

Fink in 2011. In 2020, he promises a “fundamental restructuring” that will bring sustainability to our investment approach, while market forces have shown interest in ESG.

An ESG-compliant asset in the form of the Spot Ether ETF could be one way to rekindle interest.

ESG investors will find assets with promising futures, with British bank Standard Chartered predicting that ETH will rise to $4,000 on May 23, the expected ETF approval date.