redoing basement cheap as possible.

So I have steps leading to my dry basement. The steps have a 1/4″ gap between steps and block walls. What can I install on the walls. Everything I read you need a vapor space.

Thinking installing sheet rock directly to walls or hardboard (faux board) right to the wall. But don’t know if thats a good idea with mold. or do you just stucco or thin set right on the block and paint.

This is the only problem area, everywhere else has foam and hat channel.