The easiest thing is to nail PRESSURE TREATED 1x4's to the concrete/block at 16 inch intervals, just like wall studs. Then you can fasten any standard wall material to those.
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However, using wood against the basement wall is like inviting mold into your basement and home. Even a dry basement will always have some level of ground moisture seeping through the concrete.
Wood, (even pressure treated one) is not waterproof. It soaks up water and it will support mold growth. The same goes for fiberglass insulation, drywall and greenboard. They all have organic compounds and they all absorb water.
If you want an insulated basement, closed cell foam board attached directly against the wall, is what the U.S. Department of Energy recommends for basements. If you want insulation and a finished look, 100% waterproof cement core insulated panels are the best choice. They will not get damaged by typical moisture and won't be ruined in a basement flood.
If all you want is to spruce up the walls, acrylic panels or encapsulated fiberglass panels are a more affordable solution. The first will just bright up the walls, the second will add some level of insulation.
For irregular stone walls, a sturdy, clear 20 mil liner or a radiant liner might be the best choice.
Drywall
Settlement cracks and cracks from ground shifting are not covered.
To effectively get rid of moisture in your basement, you can use a dehumidifier to reduce humidity levels, fix any leaks or cracks in the walls or foundation, improve ventilation, and consider waterproofing the basement walls and floors.
When looking to insulate the basement you must first get enough cemete to cover the walls. Then you must from the basement then fill the frame with cement.
A basement where the walls have not been drywalled or plastered.
You don't water proof the wood. The basement walls are made of concrete or concrete block - a porous material. That concrete can be sealed before you stud and cover the walls with wood. On the exterior, the dirt is dug away from the basement walls, then the areas of those walls that will be underground are first covered in a special plastic then tar is applied and the dirt is pushed back up against the foundation. The dirt should be graded away from the house so that water is directed away from the foundation and not toward it.
Some creative ideas for decorating or enhancing a basement with cinder block walls include painting the walls with bright colors, adding wall decals or murals, hanging artwork or tapestries, installing shelves or storage units, using fabric or curtains to cover the walls, and incorporating plants or greenery for a natural touch.
Basement walls can leak when it rains due to water seeping through cracks or gaps in the foundation. The pressure from the saturated soil outside the basement can also force water into the walls. Additionally, poor drainage around the foundation can lead to water pooling and eventually finding its way into the basement.
There are a number of good ways one can keep their basement dry. One can improve better drainage to direct rain water away from ground where the basement is located. Use waterproof masonry paint on the walls of the basement.
Using an insulation blanket for basement walls can help regulate temperature, reduce energy costs, prevent moisture buildup, and improve overall comfort in the basement.
You can use spackling paste or putty to cover holes in walls. Apply it with a putty knife, let it dry, then sand it smooth before painting over it.
Doubtful, especially if they are crumbling just due to wear and tear or normal deterioration. These are specifically excluded by most policies.