[elawton]

I'd advise against doing any kind of waterproofing or sealing drywall/sheetrock, particularly the edges. You won't get a good joint between 2 pieces and it would be difficult to apply to the crumbly edges anyway. I doubt it would look good when it's sanded.

If you're that worried about potential mould and mildew and don't want to use regular drywall or cement board and want to save money, use the green type of water-resistant drywall that's meant for bathroom walls. It handles exactly like drywall but it has that extra coating to resist moisture damage (not submersible, mind you!). It goes without saying you must also have a vapour barrier, whoops I said it.

Another important mould prevention trick if you're using wood studs in the basement is to put a moisture barrier between the concrete floor and walls and the wood. They should not touch because the concrete is porous. You can easily get mould and mildew forming on the wood studs from condensation before it starts to affect the drywall. Think about that.

I had an end roll of roof felt (tar paper) left over from another job that I cut into strips the width of a 2 X 4. I laid this down underneath the studs before screwing down the baseplate and all points where it contacts the concrete basement wall. This should prevent water wicking up into the wood studs. If I was using drywall I would then keep the bottom edge at least a 1/4 inch off the concrete (level at the top of course) to avoid contact with the cold floor. This gap will eventually be hidden by the sub-floor.