RESEARCH FOCUS | THURSDAY, 26 AUGUST 2021; 10:03 CET 1/22

NEXT GENERATION

EXPLORING DECENTRALISED FINANCE (DEFI)

WHAT CAN DEFI ACTUALLY DO?
• Digital assets over time should move from the alternative to the decentralised (no completely decentralised activity exists at the
core part of most diversified portfolios, and could be the wealth moment).
multiplier of this generation.
• They are best approached through the lens of a sophisti- 1. Centralised
cated/accredited investor with a good risk/reward framework. Characteristics: Custodial (keeps your assets for you), uses cen-
Start small, buy “motherships” and stay diversified. tralised price feeds (called oracles), centrally-determined interest
• Decentralised finance (DeFi) has the potential to disintermedi- rates, centrally-provided liquidity for margin calls. Examples: Salt,
ate the middleman but more for basic functions like lending, se- BlockFi, Nexo, Celsius, Crypto.com.
curities trading and passive income generation.
• DeFi has an attractive yield opportunity for investors, ranging 2. Semi-Decentralised
from 2% to 13% for stable assets pegged to the US Dollar. Risks Characteristics: Non-custodial (you keep your own assets in your
here are the institutions backing these “stablecoins” are private eWallet), decentralised price feeds, permissionless initiation of
companies and not backed by any central authority. margin calls, permissionless margin, decentralised interest rate
determination, decentralised platform development/updates. Ex-
Kelly Chia amples: Compound, MakerDAO, Uniswap, Aave and Venus.
+65 6827 1925, kelly.chia@juliusbaer.com
In our previous flagship next generation report: Future of Finance:
Banking at a cross roads (published 14 July 2021), we touched on
FUTURE OF FINANCE the various uses of DeFi ranging from borrowing/lending, margin
Once at the forefront of digitalisation, financial institutions have trading, decentralised exchanges, synthetic assets, insurance and
fallen behind, still feeling the aftereffects of the Great Financial gaming/lottery. In this ongoing educational mini-series, will high-
Crisis. Established business models are threatened by the rise of light a few of the DeFi platforms that perform these functions:
newcomers, such as in financial technology (FinTech), digital as-
sets or decentralised finance (DeFi). A new cycle of innovation is  Asset management: Metamask, Ledger, Fireblocks
underway, shaping the Future of Finance.  Decentralised Exchanges (DEX): Uniswap
 Lending and Borrowing: Compound and Venus
In this report, we delve into Decentralised Finance (DeFi), high-
lighting key platforms and their value propositions. As DeFi is What is DeFi staking and why is it so hot?
rapidly evolving and changing, it would be naïve to consider this We highlighted the yield opportunity in DeFi earlier. This is cen-
as a full cover of this incredible technological innovation. While tred around “staking” and lending. The concept of staking has
niche today, future applications could have a material impact on been around for several years, but became popular in the “DeFi
day-to-day life, given the efficiency benefits inherent in them. To summer of 2020”. Staking gets users to hold their crypto holdings
date largely constrained to crypto currencies, DeFi will soon also by locking them with a validator in the network. Every proof-of-
be a link for investing in real assets (e.g., DeFi mortgages, to- stake (POS) blockchain protocol relies on these validators to en-
kenised real assets like art/real estate etc.) sure the security of the protocol. In turn, when you stake your to-
kens with these validators, you get rewarded with a yield (in the
Today, most DeFi activity is executed via Decentralised Apps form of crypto) as passive income. Yields can go from single digit
(Dapps). These DeFi Dapps stand to revolutionise traditional fi- to double digits depending on demand and supply. Unlike mining,
nancial services by removing the need for middlemen for the this does not require expensive machines nor does it consumer
basic financial services but sophisticated services still require a massive amounts of power. Prior to 2020, it was relatively difficult
more nuanced and deliberate approach. For the purposes of this to stake but with many wallets incorporating the Dapps for stak-
report we divide the space into 2 segments: centralised and semi-

Julius Baer Research | Please find important legal information at the end of this document.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 2/22

ing, it has become significantly easier. However, with higher in- USD268m of assets is locked in an account that requires pass-
vestor participation, this has resulted in yields declining signifi- words from the Poly Network and the hacker. Interestingly, this
cantly from just 12 months ago. hack was supposedly done by a “white hat” that was aiming to ex-
pose weaknesses without the intent of stealing the funds. This
What is a validator node? raises our base case that DeFi will shift towards centralised DeFi
A validator node is technically a computer or electronic device (CeDeFi) for investor protection reasons. The discrepancy in the
running software. Nodes maintain either a full or partial copy of levels of regulation (or lack of it) between DeFi and Traditional Fi-
the blockchain and employ their computing power to confirm new nance (TradFi) is so large that regulators are unlikely to let the
blocks and voting in the finalisation protocol. Validators are re- gap stay so wide.
quired to have an uptime of more than 99.9% on their machine. A
fixed number of validator nodes are elected each staking era by Will regulation “destroy” the case of digital assets? We do not
an election algorithm. This algorithm will automatically select the think so. We take the view that a vast majority of investors are
validators with the highest total stake to fill the available slots. willing to be identified and not stay anonymous in the blockchain
if the asset class possesses large return potential. Moreover, most
How does a validator distribute rewards? investors are already used to investing in regulated traditional as-
There is a default commission rate that all validators of a protocol sets.
start with. However, some validators choose to lower this com-
mission rate so that stakers will choose to put their assets with In terms of earning yield, staking is not a risk-free model. When
them thereby increasing their stake in the protocol and their staking your digital assets, you may be incurring more risk espe-
chances of confirming more blocks to earn the transaction fee. cially if you rely on a centralised platform to do so. Hacks are in-
The fee is then distributed to all the stakers in the proportion to creasingly common in all spaces (not just the cryptocurrency
what they have staked to the validator. space), which means platforms may fail to secure investors’ funds
if they are hacked and are unable to pay them back.
What are staking pools?
Staking pools are somewhat similar to crypto mining pools. Set- Liquidity is also a risk as lockup periods are common for staking
ting up and maintaining a Proof of Stake (POS) staking pool is a and while funds may be safe, their value can shift dramatically
lot of work and requires technical expertise but is significantly less during that period. In a big drop, staked assets cannot be sold
than Proof of Work (POW) set ups like for Bitcoin. Therefore, a and the decline in value when finally available for sale can be sub-
staking pool is created when a group of network participants com- stantial.
bine their smaller quantum assets together in a bid to increase
their chances of being rewarded. It’s worth noting that while the We highlight the yields available for lending out stablecoins (digi-
term “staking” is thrown around frequently, what actually hap- tal coins pegged to the US Dollar) and the upgraded Ethereum2.0
pens could be lending or farming. protocol below. Yields here are significantly higher than what in-
vestors are able to get in the traditional financial system due to
Lending is straightforward. Some DeFi protocols allow users to inherently higher risks.
lend assets to borrowers on their platform to earn interest on their
holdings. These platforms let users keep custody of their assets Lending and staking yields
and interest rates can vary by the minute. In some cases, proto- Stable coin lending Reward (%) Platform type
cols distribute their tokens as a reward to users who contribute li- YouHodler 12.00 Custodial
quidity to the protocol, in a process called farming. Hodlnaut 12.00 Custodial
Nexo 10.00 Custodial
Staking pools usually require users to lock their coins/tokens in a Blockfi 8.60 Custodial
specific address on the blockchain that are operated by node vali- Celcius Network 8.51 Custodial
dators. These validators often charge a fee to participants in or- Zipmex 8.51 Custodial
der to cover operating costs. These costs can be, for example, re- Inlock 8.35 Custodial
lated to the hardware used to set up a node. SwissBorg 8.16 Custodial
DDEX 7.50 Decentralised
“You can’t control your returns, but you can control your risk.” Cake DeFi 7.00 Decentralised
______
ETH 2.0 staking Reward (%) Platform type
Does DeFi have risks? Of course! Cream Finance 10.08 Custodial
One of the largest hacks in the short history of DeFi is a MyCointainer 9.97 Custodial
USD611m heist on 10 August 2021. The cross-chain infrastruc- Stake Capital 9.86 Decentralised
ture platform Poly Network lost those user funds because of mis- Rocket Pool 9.86 Decentralised
management of private keys. However, the cryptocurrency Tether StakeWise 9.86 Decentralised
was able to help mitigate the attack by blacklisting the hacker’s Guarda Wallet 9.86 Custodial

wallet from sending, receiving or redeeming stolen coins. In the Lido Finance 9.86 Custodial
Blox Staking 9.76 Decentralised
latest developments, a strange twist of events made the hacker
Source: Staking rewards, Julius Baer. Data as of 20 August 2021.
actually return almost all of those funds to the Poly Network. The
Past performance and performance forecasts are not reliable indicators of
Poly Network said all but USD33m of the USD611m worth of sto-
future results. The return may increase or decrease as a result of currency
len tether digital coins have now been returned. However, fluctuations.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 3/22

Starting in DeFi Metamask: Hot wallet solution

The first step in engaging in the DeFi ecosystem is to be able to
manage one’s assets via eWallets (for individuals) and institu-
tional grade custody (for professionals). These are the asset man-
agement tools that will enable the investor to start “Swapping as-
sets” in Uniswap as a decentralised exchange and “lending/bor-
rowing and staking” in Compound Finance and Venus Finance.

eWallet: What does it do?

For individual investors to start in their crypto journey, they need
an electronic wallet. An eWallet is a user-friendly interface to the
blockchain network. It manages your private keys, which are basi-
cally keys to the lock on your cryptocurrencies’ vault. Wallets al-
low you to receive, store and send cryptocurrencies. Some of
these “hot wallets” are software programs installed on our mobile
phones and desktops, much like a banking app. “Cold wallets” are Source: Metamask, Julius Baer.
typically USB flash drive sized gadgets that are designed to be
disconnected from the internet (just pull it out of the UBS port). Ledger: Cold wallet solution
They are designed to keep and secure your private keys inside the
physical device itself. Cold wallets are considered safer though
more inconvenient for interacting with the crypto ecosystem.

It is to be noted that most eWallets are non-custodial. This means

that the software company that created the eWallet does not
hold any users’ funds/assets. It is just an interface to access these
digital assets in the blockchain. As such, even if there is a hack on
eWallet providers, their non-custodial nature means that all users’
funds are safe as they are not held by them. However, this also
means the user is fully responsible for safe keeping their security
key words to access their assets stored on the blockchain.
Source: Ledger, Julius Baer.
Metamask is a very commonly used hot wallet which can be in-
stalled on a desktop or mobile phone. Public sources indicate that Fireblocks: Institutional grade solution
there are about 8m monthly users of Metamask. Ledger is one of
the more popular cold wallet brands that support a large number
of coins and tokens.

Institutional “wallets” adoption and custody

As institutional adoption of digital assets accelerate, there are
many providers of crypto related solutions. The likelihood that
the investment professional having to manage an eWallet their
institution is very unlikely. As such, there are many solutions for
institutions in the market. For example, Fireblocks (not listed)
builds tools for the secure storage and transfer of bitcoin and
other cryptocurrencies and is one of the larger providers of tech- Source: Fireblocks, Julius Baer.
nologies to both traditional and digital banks. Traditional finance
(TradFi) companies like banks plan to use Fireblocks’ technology
to underpin their new crypto businesses. This mostly involve
plans to serve as a custodian for digital assets along with DeFi en-
gagement on behalf of their clients. These solutions usually com-
bine both multi-party computation-based cryptography with
chip-level isolation technology.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 4/22

Uniswap: What does it do? Uniswap monthly revenue trends

Uniswap is a decentralised exchange (DEX) protocol built on USDm
Ethereum. It is effectively an automated liquidity protocol, mean- 300
YTD revenue: USD850m
ing there is no order book or any centralised entity required to
250
make trades. Uniswap allows users to trade without intermediar-
ies, with a high degree of decentralisation and is censorship-re-
200
sistant. Traders can swap Ethereum based tokens on Uniswap
without having to trust anyone with their funds. Meanwhile, any- 150
one can lend their crypto to special reserves called liquidity pools.
In exchange for providing money to these pools, they earn fees. 100

Competitors include Sushi Swap and Pancakeswap.

50

Different sources point to Uniswap having between 11-50 em- 0

ployees. As of 20 August 2021, it had USD16.3bn in total value Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
20 20 20 20 20 20 20 21 21 21 21 21 21 21 21
locked (TVL) and has an undiluted market cap (circulating coins x
price of coin) of USD16.6bn. To top it all off, Uniswap was built Source: The Block, Julius Baer. Data as of 20 August 2021.
on open source software! The protocol so far only had to raise one Past performance and performance forecasts are not reliable indicators of
Series A round of USD11m in June 2020 with Andreessen Horo- future results. The return may increase or decrease as a result of currency
witz with additional investments from USV, Paradigm, Version fluctuations.
One, Variant, Parafi Capital, SV Angel, and A.Capital.
Uniswap’s token pairs dominate the market
Uniswap: How does it provide liquidity “automatically”? coin pairs
Uniswap uses a tweaked design of the Automated Market Maker 3000 25%

(AMM) model and are basically smart contracts that hold liquid- 2506 21.70%
2500
ity reserves (also called liquidity pools with the famous x * y = k 20%

formula) that traders can trade against. These pools are funded
2000
by liquidity providers of which anyone can be a liquidity provider. 15%
All they have to do is to deposit an equivalent value of two tokens 1500
in the pool. In return, traders pay a fee to the pool that is then 10%
922
distributed to liquidity providers according to their share of the 1000 8%
7.30%
pool. 551
5%
500

Uniswap: So much trading, it must be minting billionaires?

0 0%
Not really… Uniswap is primarily backed by Paradigm (a crypto Uniswap (v2) Uniswap (v3) Sushiswap
hedge fund). All fees go to liquidity providers, and none of the Coin pairs (LHS) Market share by volume (%)

founders get a cut from the trades that happen through the pro- Source: Coingecko, Julius Baer. Data as of 20 August 2021.
tocol. Currently, the transaction fee paid out to liquidity providers Past performance and performance forecasts are not reliable indicators of
is 0.3% per trade. Remember, the fees are distributed according future results.
to each liquidity provider’s share of the pool. So unless one is a
major liquidity provider (also called Uniwhales), the earn rate Uniswap vs Coinbase trading volume and staff count
would be more of a passive income. However, holders of the gov- Axis Title
ernance token called UNI could eventually vote on sharing the 2000 1895 12.0

fees with liquidity providers in the future. 1800

10.0
1600 9.7

Uniswap: What are the limitations of DEXs? 1400

8.0
The majority of crypto trade still takes place in centralised ex- 1200
changes (CEX, eg. Binance, Coinbase, FTX). Order books on CEX 1000 6.0
have historically been deeper when compared to DEXs and in turn 800
749

give better prices and lower slippage when making trades. 600
4.0

367
400
2.0
CEX also include many advanced trading features such as limit
200
38
orders, stop-loss orders, trailing stops etc. Most of these trading 0.4
0 0.0
features are not yet available on DEXs but are slowly getting in- Uniswap Coinbase
corporated (eg. DyDx DEX). Volume (bn) Staff Volume to staff ratio (RHS)

Source: Uniswap, Coinbase, Julius Baer. Data as of 20 August 2021.

DeFi popularity has unfortunately resulted in a congested
Ethereum network (able to create blocks at around 10-12/sec).
This congestion has made transaction fees (called gas costs in
crypto world) to increase significantly. Making a trade on a DEX
can be a costly transaction, especially during peak periods. The
good news is that this should be solved with the ETH2.0 upgrade
that is ongoing.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 5/22

Compound: What does it do? investor will still have to pay back the borrowed amount with in-
Compound is like a bank account to earn interest in the DeFi terest, and the ETH they put up as collateral will get liquidated
world. Users can deposit their crypto tokens and earn interest at (basically, its a margin call).
rates that are usually better than traditional banks. It also lets us-
ers borrow other cryptoassets against your deposits. It uses smart Compound monthly revenue trends
contracts that automate the storage and management of the cap- USDm
ital being added to the platform. This means anyone can connect 50
YTD revenue: USD210m

to Compound and earn interest using a Web 3.0 wallet (hot or 45

cold). This defines Compound as a permissionless protocol. Dif- 40
ferent sources point to Compound having between 11-50 em- 35
ployees. As of 20 August 2021, it had USD10.2bn in total value 30
locked (TVL) and has an undiluted market cap (circulating coins x 25
price of coin) of USD2.5bn. It is backed by Andreessen Horowitz, 20
Paradigm, Bain Capital Ventures and Polychain Capital. Its key 15
competing protocols are Aave, Curve and Cream finance. 10
5
Compound: How are its interest rates determined? 0
The interest rates for supplying and borrowing on Compound are Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
20 20 20 20 20 20 20 21 21 21 21 21 21 21 21
adjusted algorithmically. This means that the Compound proto-
col automatically adjusts them based on supply and demand. Source: The Block, Julius Baer. Data as of 20 August 2021.
Higher demand and lower supply for a particular coin gives it a
higher interest rate and vice versa. Compound’s token (called Compound Finance annualised percentage yields
cTokens) holders have the collective power to make adjustments
to interest rates. Token Lender APY (%) Borrow vs supply*
Ether 0.17 0.07
To woo the institutional client, Compound has launched “DeFi Wrapped bitcoin 0.5 0.12
Treasury”. Clients will need to simply transfer US Dollars into Uniswap 0.78 0.14
their Compound Treasury account and instantly gain access to in- Compound 0.77 0.16
terest rates of 4% per annum. Funds and withdrawals can be Chainlink 0.71 0.15
made at any time with a 24-hour turnaround, and there are low
Ox 0.88 0.16
minimums, no maximums, and no fixed terms or durations. Com-
pound added that the product launch follows many months of
customer and regulatory compliance research. Stable Coins Lender APY (%) Borrow vs supply*
USD Coin 2.73 0.71
Compound: How does it actually work? Dai 2.58 0.72
An investor connects their ewallet to the Compound network and USD Tether 2.15 0.63
starts depositing their token into the system. They are in turn Source: Venus finance, Julius Baer. Data as of 20 August 2021.
given cTokens where it represents a claim on their assets that Past performance and performance forecasts are not reliable indicators of
they just deposited. future results. The return may increase or decrease as a result of currency
fluctuations. * - when the borrow/supply ratio < 1, it means there are more
investors who are lending out tokens than borrowers. Lower ratio usually
For example, if an investor deposits ETH into Compound, it's
means lower APY as there is less demand. Higher ratio (like stablecoins)
converted to cETH. If we deposit USDC (a stablecoin pegged to gives lenders higher APYs.
US dollars), it's converted to cUSDC. If we deposit multiple coins,
we will automatically each earn interest based on their prevailing Compound’s total value locked
individual interest rates. When we want to exit the position, the
USDbn
cTokens are redeemed and original supplied tokens will be re- 12
turned to the eWallet along with its relevant interest earned.
10
Compound: Is it just to earn interest on crypto?
We highlighted that a better use of digital assets is to earn inter- 8

est on them rather than leaving them lying around and hoping
6
prices go up. However, Compound can also be a good way for
more advanced investors to increase leverage on a position. For 4
example, if an investor was bullish Ethereum (ETH), and they
supply that ETH to the Compound protocol as collateral. Subse- 2
quently, they borrow a stable coin like USDC against the ETH
they provided and buy more ETH with it. If the price of ETH goes 0
Aug 20 Nov 20 Feb 21 May 21 Aug 21
up and the profits earned are more than the interest paid for bor- Total Value Locked (bn)
rowing, they make a profit. As we all know, this process of lever-
Source: Dapp Radar, Julius Baer. Data as of 20 August 2021.
aging up also increases the risks. If the ETH price goes down, the
Past performance and performance forecasts are not reliable indicators of
future results.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 6/22

Venus: What does it do? Venus finance annualised percentage yield

Venus is a DeFi protocol that operates on the Binance Smart
Token Lender APY (%) Borrow vs supply*
Chain (BSC) and allows you to deposit cryptos to generate inter-
Bitcoin 2.11 0.25
est, as well as to take loans secured by collateral. Essentially, it is
a copy of many of the lending platforms on Ethereum such as the Ether 1.15 0.17
afore-mentioned Compound Finance. Yields are noticeably higher Swipe 0.51 0.07
in the BSC network than on the Ethereum network due to de- Binance coin 6.59 0.62
mand/supply dynamics. XVS is the governance token of Venus Polkadot 0.56 0.08
and allows its holders to vote and make decisions on the fate of Ripple 0.42 0.07
the platform. Different sources point to Venus having between Venus XVS 5.81 0.16
11-50 employees. As of 20 August 2021, it had USD2.7bn in total
value locked (TVL) and has an undiluted market cap (circulating
Stable Coins Lender APY (%) Borrow vs supply*
coins x price of coin) of USD405m. The development of the Venus
project is being undertaken by the Swipe project team which is USD Tether 13.34 0.89
developing a crypto debit card to bridge the use of crypto assets Binance USD 10.1 0.86
in the real world. There are no pre-mines for the team, developers USD Coin 11.28 0.87
or founders, giving XVS holders total control over the path the Source: Venus finance, Julius Baer. Data as of 20 August 2021.
Venus Protocol takes. Past performance and performance forecasts are not reliable indicators of
future results. The return may increase or decrease as a result of currency
fluctuations. * - when the borrow/supply ratio < 1, it means there are more
Venus: Just another copy cat?
investors who are lending out tokens than borrowers. Lower ratio usually
In general, many of the DeFi platforms that are emerging are means lower APY as there is less demand. Higher ratio (like stablecoins)
modified platforms (or in industry jargon “forks”) of the pioneer gives lenders higher APYs.
batch of protocols like Uniswap and MakerDAO. This is because
most of the protocols is basically built off open source code and Venus finance total value locked
readily available on Github (a public storage of computer codes).
USDbn
Hence, Venus is a fork of MakerDAO and Compound, and essen- 8
tially modified the codes to enable features from these two proto-
7
cols.
6

Venus: The USD200m hack USD200m hack on

5
18 May contributed
On 18 May 2021, Venus Protocol suffered a large USD200m liqui- to the fall in TVL
4
dation. Here is the supposed chain of events:
3

 8 May 2021: Collateral Factor was increased from 60% to 2

80% for borrowing of funds with XVS as collateral.
1

 18 May 2021: XVS price shot up from USD80 to USD145 in 3 0

Dec 21 Feb 22 Apr 22 Jun 22 Aug 22
hours in the midst of a crypto bear market. A huge amount Total Value Locked (USDbn)
of loans were borrowed during this time providing XVS as
Source: Dapp Radar, Julius Baer. Data as of 20 August 2021.
collateral. Past performance and performance forecasts are not reliable indicators of
future results. The return may increase or decrease as a result of currency
 This led investors to sell their XVS to secure profits. In the fluctuations.
next 4 hours, XVS price declined sharply to the initial price of
USD80. This triggered liquidations which led to the
USD100m of bad debt that Venus still cannot recover.

 19 May 2021: Venus founder, Joselito Lizarondo, writes a re-

port about the incident describing how all the funds are safe
and there were no attacks on the protocol. He states that the
price hike was “caused by large market orders and expecta-
tion on the new Venus Reward Token (VRT)”. VRT was Ve-
nus’s new reward token that was about to launch.

 With chain analysis now more available, there has been some
commentary that the hack was an inside job while other rea-
sons point to “improper price discovery” of the XVS token.

Of course, this pales in comparison to the USD600+m hack in the

polygon network on 10 August 2021. We highlight this event as a
cautionary tale that nascent industries are best engaged by a so-
phisticated investor with an appropriate risk/reward framework.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 7/22

Conclusion
DeFi is brimming with potential because of two key characteris-
tics. First, it has the theoretical potential to not just target one
area of finance, but rather could replace existing systems from
borrowing and lending over decentralised exchanges to passive
income generation and insurance. Second, all those use cases can
potentially be interconnected quite effortlessly. The final leap
from digital world to real world will likely come from tokenisation
of physical assets like large quantum assets like real estate and
rare art which can be easily transacted in the blockchain in smaller
quantums after its tokenised.

Risks: The risks around hacks will be a prevailing issue but should
be ironed out as continued auditing processes and white-hat
hackers help plug vulnerabilities in the blockchain code. In this
light, the older the protocol, the more likely that the iterative pro-
cess of audits and checks will make it safer than newer protocols.

Regulation: While regulation could be viewed negatively for

crypto assets, we are more skewed to think that it will help sepa-
rate the wheat from the chaff. This means better investor protec-
tion against scams and more transparency to prevent use of
crypto for illicit activities. We also see that investors will be willing
to be identified and not stay anonymous in the blockchain, espe-
cially if the asset class has potential for significant gains.

CeDeFi: Our long-term projection is that many promising aspects

of DeFi will be incorporated into existing financial structures ra-
ther than replacing them in a revolutionary and disruptive fash-
ion. For example, DEXs have the potential to be quite an im-
provement over the existing infrastructure when it comes to
transparency and settlement speed. If a market exchange utilises
a smart contract based trading environment instead of the cur-
rent databases, acts as an KYC/AML checking gate keeper, auto
reports to a regulator, and has the chance to correct course given
code based errors, that is a much more future proof scenario
compared to the completely revolutionary visions of true decen-
tralised finance.

Top 10 tokens by staked value

Token Reward (%) Staked value (USDbn) Market cap (USDbn) Total staked (%)
Cardano 6.3 50.2 69.3 70.0
Solana 5.9 28.9 21.3 77.4
Ethereum 2.0 5.7 20.4 356.3 5.7
Polkadot 13.5 16 24.8 59.8
USD coin 5.4 11.6 27.5 N/A
Terra 6.9 11.2 12.7 36.2
Avalanche 9.7 6.5 5.1 56.8
Binance Smart Chain 16.4 5.9 62.3 66.9
Algorand 5.5 5.4 3.1 50.2
Cosmos 9.0 3.7 5.4 70.1

Source: Staking Rewards, Julius Baer.

Past performance and performance forecasts are not reliable indicators of
future results. The return may increase or decrease as a result of currency
fluctuations. Data as of 20 August 2021.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 8/22

Proof of Work vs Proof of Stake

Proof of Work (POW) Proof of Stake (POS)

Validating capacity depends on the % stake in the

Mining capacity dependent on computational network and not sheer computational power. PoS is
power, leading to specialised mining hardware considered to be up to 99% more energy efficient vs
Computer power which consumes a lot of energy PoW

Miners get block rewards by solving a Validators do not get a block reward. Instead, they
cryptographic puzzle that gets increasingly collect transaction fees as their reward. This block is
difficult. The first miner that solves the puzzle awarded by an algorithm based on the % stake in the
Reward structure gets the block and the corresponding reward. network.

Hackers would need to have a computer system

that is more powerful that 51% of the entire The hacker would need to own 51% of all the
network to add a malicious block. This is known cryptocurrency in that network, a near impossibility for
Hackability as a 51% attack. large protocols like Ethereum or Bitcoin.

Energy consumption is high and ever increasing. While there is less energy consumption issues for POS,
Also, whoever has most capital, can buy more massive capital deployment by "whales" into smaller
high end machines and will have a higher networks creates huge inequality as they can command
ESG issues probability of getting the block award. most of the staking rewards or hack the protocol.
Source: Julius Baer.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 9/22

Thematic equity overview

Company Exposure * Rating Consensus PriceCcy Market cap. Performance (%) ISIN
Leader I Laggard (Equity) (Buy/Hold/Sell) (USDbn) 1m 3m 12m 5y

Hardware manufacturers (ASICs, GPUs, related components)

TUL Corporation ○○○I●●○ n.c. Buy (0/0/0) 147.0TWD 0.24 4 4 203 978 TW0006150006
Nvidia ○○○I●○○ Reduce Buy (38/5/3) 219.6USD 548.95 12 41 73 1327 US67066G1040
AMD¹ ○○○I●○○  Buy (25/16/2) 108.8USD 131.93 18 40 31 1357 US0079031078
Bitmain ○○○I●●● n.c. n.c. (-/-/-) - - - - - - - -
TSMC ○○○I○○○ Buy Buy (6/3/0) 111.0USD 575.45 -5 -2 41 288 US8740391003
Global Unichip ○○○I●●○ n.c. Buy (6/2/2) 409.5TWD 1.96 -6 16 44 449 TW0003443008
Crypto mining firms
Hive Blockchain Technologies ○●●I○○○ n.c. Buy (1/0/0) 3.9CAD 1.17 41 36 760 - CA43366H1001
Bitfarms ○●●I○○○ n.c. Buy (1/0/0) 7.3CAD 0.97 76 44 1588 - CA09173B1076
Hut 8 Mining Corp ○●●I○○○ n.c. Buy (2/0/0) 8.7CAD 0.99 70 83 673 - CA44812T1021
Marathon Digital Holdings¹ ○●●I○○○  Buy (3/0/0) 36.8USD 3.66 49 59 1491 -19 US5657881067
Riot Blockchain¹ ○●●I○○○  Buy (4/0/0) 35.7USD 3.43 27 38 884 979 US7672921050
Bit Digital ○●●I○○○ n.c. Buy (0/0/0) 11.4USD 0.63 170 35 154 - KYG1144A1058
Argo Blockchain ○●●I○○○ n.c. Buy (2/0/0) 137.5GBp 0.72 24 17 1893 - GB00BZ15CS02
Crypto exchanges and brokerage firms
Coinbase ○○○I●●● n.c. Buy (15/5/2) 256.0USD 54.00 14 14 - - US19260Q1076
Monex Group ○○○I●●● n.c. Hold (0/1/0) 599.0JPY 1.41 -8 -22 119 144 JP3869970008
CME Group ○○○I○○○ Hold Hold (6/13/1) 201.8USD 72.49 -5 -7 17 91 US12572Q1058
GMO Internet ○○○I●○○ n.c. Buy (3/3/0) 2767.0JPY 2.82 -3 -7 -5 89 JP3152750000
Voyager Digital ○○○I●●● n.c. Buy (7/0/0) 18.4CAD 2.06 8 -9 1860 - CA92919V1085
Plus500¹ ○○○I○○○  Buy (2/1/2) 1492.5GBp 2.07 8 -4 3 106 IL0011284465
Intercontinental Exchange ○○○I○○○ Buy Buy (14/4/0) 118.1USD 66.49 -3 5 12 113 US45866F1049
Blockchain software firms
DMG Blockchain Solutions ○○○I●○○ n.c. Buy (1/0/0) 1.3CAD 0.17 75 41 1322 6300 CA23345B2003
BIGG Digital Assets ○○○I●○○ n.c. n.c. (-/-/-) 1.4CAD 0.21 5 -13 585 987 CA0898041086
Future Fintech Group ○○○I●○○ n.c. Buy (0/0/0) 2.5USD 0.18 4 -8 13 -59 US36117V1052
Crypto-Banking and similar services
Bitcoin Group Se ○○○I●○○ n.c. Buy (0/0/0) 37.7EUR 0.22 8 -8 43 - DE000A1TNV91
Silvergate Capital ○○○I●○○ n.c. Buy (5/2/0) 108.1USD 2.87 3 2 627 - US82837P4081
Galaxy Digital Holdings ○○○I●○○ n.c. Buy (1/1/0) 22.3CAD 5.65 29 21 453 - KYG370921069
Investview ○○○I●○○ n.c. Buy (0/0/0) 0.2USD 0.51 -10 -19 514 2991 US46183W1018
Big corporations that are early blockchain adopters
Square¹ ○○○I○○○  Buy (34/12/4) 270.4USD 124.32 2 28 78 2097 US8522341036
Oracle ○○○I○○○ Hold Hold (5/17/5) 89.1USD 248.82 2 12 59 117 US68389X1054
Facebook ○○○I○○○ Buy Buy (46/8/3) 363.4USD 1024.45 -2 12 34 193 US30303M1027
IBM ○○○I○○○ Hold Hold (4/12/2) 139.6USD 125.14 -1 -4 11 -12 US4592001014
Softbank ○○○I○○○ Hold Buy (19/0/0) 6179.0JPY 97.00 -15 -26 -1 84 JP3436100006
Mastercard ○○○I●○○ Buy Buy (36/6/1) 361.0USD 356.24 -8 -3 5 278 US57636Q1040
Visa ○○○I●○○ Buy Buy (36/5/1) 234.1USD 514.51 -6 2 13 192 US92826C8394
JP Morgan ○○○I○○○ Hold Buy (18/9/3) 156.7USD 468.24 4 -4 57 137 US46625H1005
Paypal ○○○I○○○ Hold Buy (45/6/1) 277.0USD 325.46 -10 8 39 638 US70450Y1038
Overstock¹ ○○○I●○○  Buy (5/0/0) 70.9USD 3.05 -14 -12 -39 359 US6903701018
MicroStrategy ○○○I●●○ n.c. Buy (3/1/0) 718.5USD 7.00 33 52 384 327 US5949724083
1 Covered by Morningstar research. Reference to Morningstar covered stocks does not constitute a recommendation by Julius Baer. Relevant equity infor-
mation (e.g. analyst name) may be found in the annex. The Morningstar Equity Research Report can be requested free of charge via your Julius Baer Rela-
tionship Manager.

Source: Bloomberg Finance L.P., Julius Baer, Morningstar; Note: This list contains covered, non-covered (n.c.) titles by Julius Baer and non-listed (n.l.)
titles. The selection of non-covered titles does not imply any recommendation by Julius Baer. *Exposure = Thematic exposure rating (or ‘theme exposure
rating’, ‘Next Generation rating’, ‘NG Rating’), which follows the Next Generation investment process, analysing a company’s exposure to structural mar-
ket growth in relation to a particular theme. Ccy = currency, Market cap. = market capitalisation, Consensus rating compiled by Bloomberg. Data as of 24
August 2021.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 10/22

IMPORTANT LEGAL INFORMATION

MORNINGSTAR ANNEX

Morningstar disclaimer (for the Julius Baer disclaimer, please refer to the end of the document)
The equity research in this publication marked with ‘1’ and in italics was produced by Morningstar and is not the result of independent
financial/investment research of Bank Julius Baer & Co Ltd. and/or any of its affiliates (Julius Baer). Julius Baer acts solely as the dis-
tributor of such Morningstar Equity Research. Bank Julius Baer & Co Ltd., Zurich, is authorised and regulated by the Swiss Financial
Market Supervisory Authority (FINMA). Julius Baer is exempt from any and all liability in relation to, or arising from, the Morningstar
Research mentioned in this publication.

Table of Morningstar covered equities mentioned in this publication

Topic Equity Rating Fair value Closing price Analyst name Date of issuance of Morn-
ingstar Qual./Quant. Eq-
uity report
Decentralized Fi- Advanced Micro Devices Abhinav Davuluri,
 USD109.00 USD107.60 19.08.2021
nance (AMD) CFA1
Marathon Digital Holdings  USD42.868 USD37.98 Quantitative2 23.08.2021
Riot Blockchain  USD41.231 USD37.63 Quantitative2 23.08.2021
Plus500  GBp1,425.689 GBp1,500.50 Quantitative2 30.06.2021
Square  USD112.00 USD270.17 Brett Horn, CFA1 03.08.2021
Overstock.com  USD78.589 USD72.65 Quantitative2 16.07.2021

1 The conduct of Morningstar’s analysts is governed by a Code of Ethics/Code of Conduct Policy, Personal Securities Trading Policy (or
an equivalent thereof), and Investment Research Policy. For information regarding conflicts of interest, please visit:
http://global.morningstar.com/equitydisclosures
2 Morningstar Important Disclosure: There is no one single analyst responsible for Quantitative Fair Value Estimate and Quantitative

Star Rating; however, Mr. Lee Davidson, Head of Quantitative Research for Morningstar, Inc., is responsible for overseeing the method-
ology that supports quantitative fair value. As an employee of Morningstar, Inc., Mr. Davidson is guided by Morningstar, Inc.’s Code of
Ethics and Personal Securities Trading Policy in carrying out his responsibilities. For information regarding conflicts of interest, please
visit:
http://global.morningstar.com/equitydisclosures

Contents under ‘Morningstar Research Methodology For Valuing Companies’ below have been produced by Morningstar; therefore, the
first person (e.g. “we” and “our”) refer to Morningstar.

MORNINGSTAR RESEARCH METHODOLOGY FOR VALUING COMPANIES

Morningstar qualitative equity reports overview

Overview
At the heart of our valuation system is a detailed projection of a company’s future cash flows, resulting from our analysts’ research.
Analysts create custom industry and company assumptions to feed income statement, balance sheet, and capital investment assump-
tions into our globally standardized, proprietary discounted cash flow, or DCF, modelling templates. We use scenario analysis, in-depth
competitive advantage analysis, and a variety of other analytical tools to augment this process. Moreover, we think analysing valuation
through discounted cash flows presents a better lens for viewing cyclical companies, high-growth firms, businesses with finite lives
(e.g., mines), or companies expected to generate negative earnings over the next few years. That said, we don’t dismiss multiples alto-
gether but rather use them as supporting cross-checks for our DCF-based fair value estimates. We also acknowledge that DCF models
offer their own challenges (including a potential proliferation of estimated inputs and the possibility that the method may miss short-
term market-price movements), but we believe these negatives are mitigated by deep analysis and our long-term approach. Morn-
ingstar’s equity research group (“we”, “our”) believes that a company’s intrinsic worth results from the future cash flows it can gener-
ate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth—or fair value estimate,
in Morningstar terminology. Five-Star  stocks sell for the biggest risk-adjusted discount to their fair values, whereas One-Star
 stocks trade at premiums to their intrinsic worth. Four key components drive the Morningstar rating: (1) our assessment of the firm’s
economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market
price. This process ultimately culminates in our single-point star rating.

1. Economic Moat
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 11/22

The concept of an economic moat plays a vital role not only in our qualitative assessment of a firm’s long-term investment potential,
but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm to sustain ex-
cess profits over a long period of time. We define economic profits as returns on invested capital (or ROIC) over and above our esti-
mate of a firm’s cost of capital, or weighted average cost of capital (or WACC). Without a moat, profits are more susceptible to compe-
tition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and effi-
cient scale.
Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next
10 years. Wide-moat companies are those in which we have very high confidence that excess returns will remain for 10 years, with ex-
cess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic
value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward the firm’s cost of capital more
quickly than companies with moats. To assess the sustainability of excess profits, analysts perform ongoing assessments of the moat
trend. A firm’s moat trend is positive in cases where we think its sources of competitive advantage are growing stronger; stable where
we don’t anticipate changes to competitive advantages over the next several years; or negative when we see signs of deterioration.

2. Estimated Fair Value

Combining our analysts’ financial forecasts with the firm’s economic moat helps us assess how long returns on invested capital are
likely to exceed the firm’s cost of capital. Returns of firms with a wide economic moat rating are assumed to fade to the perpetuity pe-
riod over a longer period of time than the returns of narrow-moat firms, and both will fade slower than no-moat firms, increasing our
estimate of their intrinsic value. Our model is divided into three distinct stages:
Stage I: Explicit Forecast
Stage II: Fade
Stage III: Perpetuity

3. Uncertainty around that fair value estimate

Morningstar’s Uncertainty Rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of
safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating represents the ana-
lysts’ ability to bound the estimated value of the shares in a company around the Fair Value Estimate, based on the characteristics of
the business underlying the stock, including operating and financial leverage, sales sensitivity to the overall economy, product concen-
tration, pricing power, and other company-specific factors.
Analysts consider at least two scenarios in addition to their base case: a bull case and a bear case. Assumptions are chosen such that
the analyst believes there is a 25% probability that the company will perform better than the bull case, and a 25% probability that the
company will perform worse than the bear case. The distance between the bull and bear cases is an important indicator of the uncer-
tainty underlying the fair value estimate.
Our recommended margin of safety widens as our uncertainty of the estimated value of the equity increases. The more uncertain we
are about the esti-mated value of the equity, the greater the discount we require relative to our estimate of the value of the firm before
we would recommend the purchase of the shares. In addition, the uncertainty rating provides guidance in portfolio construction based
on risk tolerance. Our uncertainty ratings for our qualitative analysis are low, medium, high, very high, and extreme.

Low: margin of safety for 5-star  rating is a 20%discount and for 1-star  rating is 25% premium.
Medium: margin of safety for 5-star  rating is a 30%discount and for 1-star  rating is 35% premium.
High: margin of safety for 5-star  rating is a 40%discount and for 1-star  rating is 55% premium.
Very high: margin of safety for 5-star  rating is a 50%discount and for 1-star  rating is 75% premium.
Extreme: Stock’s uncertainty exceeds the parameters we have set for assigning the appropriate margin of safety.

4. Market Price
The market prices used in this analysis and noted in the report come from exchange on which the stock is listed which we believe is a
reliable source. For more detail information about our methodology, please go to:
http://global.morningstar.com/equitydisclosures

Morningstar Star Rating for Stocks

Once we determine the fair value estimate of a stock, we compare it with the stock’s current market price on a daily basis, and the star
rating is automatically re-calculated at the market close on every day the market on which the stock is listed is open. Our analysts keep
close tabs on the companies they follow, and, based on thorough and ongoing analysis, raise or lower their fair value estimates as war-
ranted. Please note, there is no predefined distribution of stars. That is, the percentage of stocks that earn 5 stars can fluctuate daily,
so the star ratings, in the aggregate, can serve as a gauge of the broader market’s valuation. When there are many 5-star 
stocks, the stock market as a whole is more undervalued, in our opinion, than when very few companies garner our highest rating. We
expect that if our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within
three years (although it is impossible to predict the exact time frame in which market prices may adjust). Our star ratings are guide-
posts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, tax situation, time horizon,
income needs, and com-plete investment portfolio, among other factors. The Morningstar Star Ratings for stocks are defined below:
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 12/22

Five-Stars  We believe appreciation beyond a fair risk-adjusted return is highly likely over a multiyear time frame. Scenario
analysis developed by our analysts indicates that the current market price represents an excessively pessimistic
outlook, limiting downside risk and maximizing upside potential.
Four-Stars  We believe appreciation beyond a fair risk-adjusted return is likely.
Three-Stars  Indicates our belief that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).
Two-Stars  We believe investors are likely to receive a less than fair risk-adjusted return.
One-Star  Indicates a high probability of undesirable risk adjusted returns from the current market price over a multiyear
timeframe, based on our analysis. Scenario analysis by our analysts indicates that the market is pricing in an ex-
cessively optimistic outlook, limiting upside potential and leaving the investor exposed to Capital loss.

Other Definitions
Last Price: Price of the stock as of the close of the market of the last trading day before date of the report.

Risk Warning
Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the in-
tended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indica-
tion of future performance. A security investment return and an investor’s principal value will fluctuate so that, when redeemed, an
investor’s shares may be worth more or less than their original cost. A security’s current investment performance may be lower or
higher than the investment performance noted within the report. Morningstar’s Uncertainty Rating serves as a useful data point with
respect to sensitivity analysis of the assumptions used in our determining a fair value price.

Morningstar General Disclosure For Qualitative Report

The analysis within this report is prepared by the person(s) noted in their capacity as an analyst for Morningstar’s equity research
group. The equity research group consists of various Morningstar, Inc. subsidiaries (“Equity Research Group)”. In the United States,
that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Com-
mission.
The opinions expressed within the report are given in good faith, are as of the date of the report and are subject to change without no-
tice. Neither the analyst nor Equity Research Group commits themselves in advance to whether and in which intervals updates to the
recommendation are expected to be made, although the research will typically be reviewed at least four times per year. The written
analysis and Morningstar Star Rating for stocks are statements of opinions; they are not statements of fact.
The Equity Research Group believes its analysts make a reasonable effort to carefully research information contained in the analysis.
The information on which the analysis is based has been obtained from sources believed to be reliable such as, for example, the com-
pany’s financial statements filed with a regulator, company website, Bloomberg and any other the relevant press sources. Only the in-
formation obtained from such sources is made available to the issuer who is the subject of the analysis, which is necessary to properly
reconcile with the facts. Should this sharing of information result in considerable changes, a statement of that fact will be noted within
the report. While the Equity Research Group has obtained data, statistics and information from sources it believes to be reliable, nei-
ther the Equity Research Group nor Morningstar, Inc. performs an audit or seeks independent verification of any of the data, statistics,
and information it receives.
Unless otherwise provided in a separate agreement, recipients accessing this report may only use it in the country in which the Morn-
ingstar distributor is based. Unless stated otherwise, the original distributor of the report is Morningstar Research Services LLC, a
U.S.A. domiciled financial institution. This report is for informational purposes only and has no regard to the specific investment objec-
tives, financial situation or particular needs of any specific recipient. This publication is intended to provide information to assist inves-
tors in making their own investment decisions, not to provide investment advice to any specific investor. Therefore, investments dis-
cussed and recommendations made herein may not be suitable for all investors: recipients must exercise their own independent judg-
ment as to the suitability of such investments and recommendations in the light of their own investment objectives, experience, taxa-
tion status and financial position.
The information, data, analyses and opinions presented herein are not warranted to be accurate, correct, complete or timely. Unless
otherwise provided in a separate agreement, neither Morningstar, Inc. or the Equity Research Group represents that the report con-
tents meet all of the presentation and/or disclosure standards applicable in the jurisdiction the recipient is located.
Except as otherwise required by law or provided for in a separate agreement, the analyst, Morningstar, Inc. and the Equity Research
Group and their officers, directors and employees shall not be responsible or liable for any trading decisions, damages or other losses
resulting from, or related to, the information, data, analyses or opinions within the report. The Equity Research Group encourages re-
cipients of this report to read all relevant issue documents (e.g., prospectus)pertaining to the security concerned, including without
limitation, information relevant to its investment objectives, risks, and costs before making an investment decision and when deemed
necessary, to seek the advice of a legal, tax, and/or accounting professional.
The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resi-
dent of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation or which would subject Morningstar, Inc. or its affiliates to any registration or licensing requirements in
such jurisdiction.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 13/22

Where this report is made available in a language other than English and in the case of inconsistencies between the English and trans-
lated versions of the report, the English version will control and supersede any ambiguities associated with any part or section of a re-
port that has been issued in a foreign language. Neither the analyst, Morningstar, Inc., or the Equity Research Group guarantees the
accuracy of the translations.
This report may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or inde-
pendent intermediaries and/or distributors (“Distributors”). Such Distributors are not acting as agents or representatives of the ana-
lyst, Morningstar, Inc. or the Equity Research Group. In Territories where a Distributor distributes our report, the Distributor is solely
responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or re-
gional regulatory bodies, including laws in connection with the distribution third-party research reports.

Morningstar Conflicts of Interest for Qualitative Equity Report:

No interests are held by the analyst with respect to the security subject of this investment research report. Morningstar, Inc. may hold a
long position in the security subject of this investment research report that exceeds 0.5% of the total issued share capital of the secu-
rity. To determine if such is the case, please click:
http://msi.morningstar.com
http://mdi.morningstar.com
Analysts' compensation is derived from Morningstar, Inc.'s overall earnings and consists of salary, bonus and in some cases restricted
stock.
Neither Morningstar, Inc. or the Equity Research Group receives commissions for providing research nor do they charge companies to
be rated.
Neither Morningstar, Inc. or the Equity Research Group is a market maker or a liquidity provider of the security noted within this report.
Neither Morningstar, Inc. or the Equity Research Group has been a lead manager or co-lead manager over the previous 12-months of
any publicly disclosed offer of financial instruments of the issuer.
Morningstar, Inc.’s investment management group does have arrangements with financial institutions to provide portfolio manage-
ment/investment advice some of which an analyst may issue investment research reports on. However, analysts do not have authority
over Morningstar's investment management group's business arrangements nor allow employees from the investment management
group to participate or influence the analysis or opinion prepared by them.
Morningstar, Inc. is a publicly traded company (Ticker Symbol: MORN) and thus a financial institution the security of which is the sub-
ject of this report may own more than 5% of Morningstar, Inc.’s total outstanding shares. Please access Morningstar, Inc.’s proxy state-
ment, “Security Ownership of Certain Beneficial Owners and Management” section:
https://shareholders.morningstar.com/investor-relations/financials/sec-filings/default.aspx
Morningstar, Inc. may provide the product issuer or its related entities with services or products for a fee and on an arms’ length basis
including software products and licenses, research and consulting services, data services, licenses to republish our ratings and research
in their promotional material, event sponsorship and website advertising.
Further information on Morningstar, Inc.'s conflict of interest policies is available from :
http://global.morningstar.com/equitydisclosures
Also, please note analysts are subject to the CFA Institute’s Code of Ethics and Standards of Professional Conduct.

Qualitative investment rating allocation as of 26/08/2021

(calculated by and derived from the investment universe of Julius Baer)
 5 Stars 3.2%  4 Stars 18.4%  3 Stars 48.2%
 2 Stars 21.6%  1 Star 8.6%
Morningstar has not in the past and will not in the future provide any investment banking services to one of their covered issuers. As a
result, no investment banking services have been provided over the last 12 months for the covered issuer in this report or any issuer in
the comparable category.

Morningstar quantitative equity reports overview

Overview
The quantitative report on equities consists of data, statistics and quantitative equity ratings on equity securities. Morningstar, Inc.’s
quantitative equity ratings are forward looking and are generated by a statistical model that is based on Morningstar Inc.’s analyst-
driven equity ratings and quantitative statistics. Given the nature of the quantitative report and the quantitative ratings, there is no
one analyst in which a given report is attributed to; however, Mr. Lee Davidson, Head of Quantitative Research for Morningstar, Inc., is
responsible for overseeing the methodology that supports the quantitative equity ratings used in this report. As an employee of Morn-
ingstar, Inc., Mr. Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Securities Trading Policy in carrying out his
responsibilities.

Quantitative Equity Ratings

Morningstar’s quantitative equity ratings consist of: (i) Quantitative Fair Value Estimate, (ii) Quantitative Star Rating, (iii) Quantita-
tive Uncertainty, (iv) Quantitative Economic Moat, and (v) Quantitative Financial Health (collectively the “Quantitative Ratings”).
The Quantitative Ratings are calculated daily and derived from the analyst-driven ratings of a company’s peers as determined by sta-
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 14/22

tistical algorithms. Morningstar, Inc. (“Morningstar”, “we”, “our”) calculates Quantitative Ratings for companies whether or not it al-
ready provides analyst ratings and qualitative coverage. In some cases, the Quantitative Ratings may differ from the analyst ratings
because a company’s analyst-driven ratings can significantly differ from other companies in its peer group.

i. Quantitative Fair Value Estimate: Intended to represent Morningstar’s estimate of the per share dollar amount that a company’s
equity is worth today. Morningstar calculates the Quantitative Fair Value Estimate using a statistical model derived from the Fair Value
Estimate Morningstar’s equity analysts assign to companies. For information about Fair Value Estimate Morningstar’s equity analysts
assign to companies, please go to:
http://global.morningstar.com/equitydisclosures

ii. Quantitative Economic Moat: Intended to describe the strength of a firm's competitive position. It is calculated using an algorithm
designed to predict the Economic Moat rating a Morningstar analyst would assign to the stock. The rating is expressed as Narrow,
Wide, or None.

Narrow assigned when the probability of a stock receiving a "Wide Moat" rating by an analyst is greater than 70% but less than 99%.
Wide assigned when the probability of a stock receiving a "Wide Moat" rating by an analyst is greater than 99%.
None assigned when the probability of an analyst receiving a "Wide Moat" rating by an analyst is less than 70%.

iii. Quantitative Star Rating: Intended to be the summary rating based on the combination of our Quantitative Fair Value Estimate,
current market price, and the Quantitative Uncertainty Rating. The rating is expressed as One-Star, Two-Star, Three-Star, Four-Star,
and Five-Star.

Five-Stars  the stock is undervalued with a reasonable margin of safety. Log (Quant FVE/Price) > 1*Quantitative Uncer-
tainty
Four-Stars  the stock is somewhat undervalued. Log (Quant FVE/Price) between (0.5*Quantitative Uncertainty, 1*Quanti-
tative Uncertainty)
Three-Stars  the stock is approximately fairly valued. Log (Quant FVE/Price) between (-0.5*Quantitative Uncertainty,
0.5*Quantitative Uncertainty)
Two-Stars  the stock is somewhat overvalued. Log (Quant FVE/Price) between (-1*Quantitative Uncertainty, -0.5*Quanti-
tative Uncertainty)
One-Star  the stock is overvalued with a reasonable margin of safety. Log (Quant FVE/Price) < -1*Quantitative Uncer-
tainty

iv. Quantitative Uncertainty: Intended to represent Morningstar's level of uncertainty about the accuracy of the Quantitative Fair
Value Estimate. Generally, the lower the Quantitative Uncertainty, the narrower the potential range of outcomes for that particular
company. The rating is expressed as Low, Medium, High, Very High, and Extreme.

Low the interquartile range for possible fair values is less than 10%
Medium the interquartile range for possible fair values is less than 15% but greater than 10%
High the interquartile range for possible fair values is less than 35% but greater than 15%
Very High the interquartile range for possible fair values is less than 80% but greater than 35%
Extreme the interquartile range for possible fair values is greater than 80%

v. Quantitative Financial Health: Intended to reflect the probability that a firm will face financial distress in the near future. The cal-
culation uses a predictive model designed to anticipate when a company may default on its financial obligations. The rating is ex-
pressed as Weak, Moderate, and Strong.

Weak assigned when Quantitative Financial Health < 0.2

Moderate assigned when Quantitative Financial Health is between 0.2 and 0.7
Strong assigned when Quantitative Financial Health > 0.7

Other Definitions
i. Last Price: Price of the stock as of the close of the market of the last trading day before date of the report.
ii. Quantitative Valuation: Using the below terms, intended to denote the relationship between the security’s Last Price and Morn-
ingstar’s quantitative fair value estimate for that security.

Undervalued Last Price is below Morningstar’s quantitative fair value estimate.

Fairly Valued Last Price is in line with Morningstar’s quantitative fair value estimate.
Overvalued Last Price is above Morningstar’s quantitative fair value estimate.

This Report has not been made available to the issuer of the security prior to publication.

Risk Warning
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 15/22

Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the in-
tended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indica-
tion of future performance. A security investment return and an investor’s principal value will fluctuate so that, when redeemed, an
investor’s shares may be worth more or less than their original cost. A security’s current investment performance may be lower or
higher than the investment performance noted within the report. The quantitative equity ratings are not statements of fact. Morn-
ingstar does not guarantee the completeness or accuracy of the assumptions or models used in determining the quantitative equity
ratings. In addition, there is the risk that the price target will not be met due to such things as unforeseen changes in demand for the
company’s products, changes in management, technology, economic development, interest rate development, operating and/or mate-
rial costs, competitive pressure, supervisory law, exchange rate, and tax rate. For investments in foreign markets there are further risks,
generally based on exchange rate changes or changes in political and social conditions. A change in the fundamental factors underlying
the quantitative equity ratings can mean that the valuation is subsequently no longer accurate. For more information about Morn-
ingstar’s quantitative methodology, please visit:
www.corporate.morningstar.com

Morningstar General Disclosure For Quantitative Report

The Quantitative Equity Report (“Report”) is derived from data, statistics and information within Morningstar, Inc.’s database as of the
date of the Report and is subject to change without notice. The Report is for informational purposes only, intended for financial profes-
sionals and/or their clients (“Users”) and should not be the sole piece of information used by such Users or their clients in making an
investment decision. While Morningstar has obtained data, statistics and information from sources it believes to be reliable, Morn-
ingstar does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives.
The quantitative equity ratings noted the Report are provided in good faith, are as of the date of the Report and are subject to change.
While Morningstar has obtained data, statistics and information from sources it believes to be reliable, Morningstar does not perform
an audit or seeks independent verification of any of the data, statistics, and information it receives.
The quantitative equity ratings are not a market call, and do not replace the User or User’s clients from conducting their own due-dili-
gence on the security. The quantitative equity rating is not a suitability assessment; such assessments take into account may factors
including a person’s investment objective, personal and financial situation, and risk tolerance all of which are factors the quantitative
equity rating statistical model does not and did not consider. Prices noted with the Report are the closing prices on the last stock-mar-
ket trading day before the publication date stated, unless another point in time is explicitly stated.
Unless otherwise provided in a separate agreement, recipients accessing this report may only use it in the country in which the Morn-
ingstar distributor is based. Unless stated otherwise, the original distributor of the report is Morningstar Inc., a U.S.A. domiciled finan-
cial institution.
This report was created with no regard to investment objectives, financial situation or particular needs of any specific User or User’s
clients. Therefore, investments discussed and recommendations made herein may not be suitable for all investors: recipients of this
report must exercise their own independent judgment as to the suitability of such investments and recommendations in the light of
their own investment objectives, experience, taxation status and financial position.
The information, data and statistics presented herein are not warranted to be accurate, correct, complete or timely. Unless otherwise
provided in a separate agreement, Morningstar makes no representation that the report contents meet all of the presentation and/or
disclosure standards applicable in the jurisdiction the recipient is located.
Except as otherwise required by law or provided for in a separate agreement, Morningstar and its officers, directors and employees shall
not be responsible or liable for any trading decisions, damages or other losses resulting from, or related to, the information, data, anal-
yses or opinions within the report. Morningstar encourages recipients of this report to read all relevant issue documents (e.g., prospec-
tus) pertaining to the security concerned, including without limitation, information relevant to its investment objectives, risks, and
costs before making an investment decision and when deemed necessary, to seek the advice of a legal, tax, and/or accounting profes-
sional.
The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resi-
dent of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation or which would subject Morningstar or its affiliates to any registration or licensing requirements in such
jurisdiction.
Where this report is made available in a language other than English and in the case of inconsistencies between the English and trans-
lated versions of the report, the English version will control and supersede any ambiguities associated with any part or section of a re-
port that has been issued in a foreign language. Neither the analyst, Morningstar, or Morningstar affiliates guarantee the accuracy of
the translations.
This report may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or inde-
pendent intermediaries and/or distributors (“Distributors”). Such Distributors are not acting as agents or representatives of the analyst
or Morningstar. In Territories where a Distributor distributes our report, the Distributor, and not the analyst or Morningstar, is solely
responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or re-
gional regulatory bodies, including laws in connection with the distribution third-party research reports.

Morningstar Conflicts of Interest for Quantitative Equity Report:

Morningstar, Inc. may hold a long position in the security subject of this investment research report that exceeds 0.5% of the total is-
sued share capital of the security. To determine if such is the case, please click:
http://msi.morningstar.com
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 16/22

http://mdi.morningstar.com
The Head of Quantitative Research compensation is derived from Morningstar's overall earnings and consists of salary, bonus and re-
stricted stock units of Morningstar, Inc.
Morningstar does not receive commissions for providing research and does not charge companies to be rated.
Morningstar is not a market maker or a liquidity provider of the security noted within this report.
Morningstar has not been a lead manager or co-lead manager over the previous 12-months of any publicly disclosed offer of financial
instruments of the issuer.
Morningstar affiliates (i.e., its investment management group) have arrangements with financial institutions to provide portfolio man-
agement/investment advice some of which an analyst may issue investment research reports on. However, the Head of Quantitative
Research does not have authority over Morningstar's investment management group's business arrangements nor allow employees
from the investment management group to participate or influence the analysis or opinion prepared by them.
Morningstar, Inc. is a publically traded company (Ticker Symbol: MORN) and thus a financial institution the security of which is the
subject of this report may own more than 5% of Morningstar, Inc.’s total outstanding shares. Please access Morningstar, Inc.’s proxy
statement, “Security Ownership of Certain Beneficial Owners and Management” section:
https://shareholders.morningstar.com/investor-relations/financials/sec-filings/default.aspx
Morningstar may provide the product issuer or its related entities with services or products for a fee and on an arms’ length basis in-
cluding software prod-ucts and licenses, research and consulting services, data services, licenses to republish our ratings and research
in their promotional material, event sponsorship and website advertising.
Further information on Morningstar's conflict of interest policies is available from
http://global.morningstar.com/equitydisclosures
Also, please note analysts are subject to the CFA Institute’s Code of Ethics and Standards of Professional Conduct.

Quantitative investment rating allocation as of 26/08/2021

(calculated by and derived from the investment universe of Julius Baer)
 5 Stars 0.8%  4 Stars 9.8%  3 Stars 74.1%
 2 Stars 10.7%  1 Star 4.6%
Morningstar has not in the past and will not in the future provide any investment banking services to one of their covered issuers. As a
result, no investment banking services have been provided over the last 12 months for the covered issuer in this report or any issuer in
the comparable category.

Morningstar methodology
Please refer to the following link for more information on the Morningstar research methodology:
http://global.morningstar.com/equitydisclosures

Morningstar recommendation history

Please refer to the following link for more information on the Morningstar recommendation history:
http://www.juliusbaer.com/recommendation-history

JULIUS BAER LEGAL INFORMATION

This document constitutes financial/investment research material and is the result of independent financial/investment
research. It has been prepared in accordance with the legal requirements regarding the independence of financial/invest-
ment research and is subject to any prohibition on dealing ahead of the dissemination of financial/investment research. It
has been produced Bank Julius Baer & Co. Ltd., Singapore branch, which is regulated by the Monetary Authority of Singa-
pore. The content within originates from Bank Julius Baer & Co. Ltd., Zurich, save in respect of analyses and recommenda-
tions expressly identified in this document as being made by an independent third party. This document series is issued reg-
ularly. Information on financial instruments and issuers will be updated irregularly or in response to important events.

IMPRINT

Authors
Kelly Chia, Equity Research Asia, kelly.chia@juliusbaer.com 1

1 This research analyst is employed by Bank Julius Baer & Co. Ltd., Singapore branch, which is regulated by the
Monetary Authority of Singapore.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 17/22

APPENDIX

Analyst certification
The analysts hereby certify that views about the companies discussed in this report accurately reflect their personal view about the
companies and securities. They further certify that no part of their compensation was, is, or will be directly or indirectly linked to the
specific recommendations or views in this report.

Methodology
Please refer to the following link for more information on the research methodology used by Julius Baer analysts:
www.juliusbaer.com/research-methodology

Structure
References in this publication to Julius Baer include subsidiaries and affiliates. For additional information on our structure, please refer
to the following link:
www.juliusbaer.com/structure

Price information
Unless otherwise stated, the price information reflects the closing price of the previous trading day.

Disclosures
Morningstar: For equity research Julius Baer partnered with Morningstar, a provider of global independent investment research. For
Morningstar analyses and recommendations expressly identified in this publication, Julius Baer acts solely as distributor of such re-
search content.

Frequently used abbreviations

adj. adjusted bps basis points c.c. constant currencies
capex capital expenditure consensus average analyst expectation DM developed market(s)
E estimate ECB European Central Bank EM emerging market(s)
Fed US Federal Reserve FX foreign exchange FY Fiscal year
GDP gross domestic product H1; H2 first/second half of the year ISM Institute for Supply Manage-
ment
l.h.s. left-hand scale m/m month-on-month market cap. market capitalisation
p.a. per annum PMI purchasing managers’ index PPP purchasing power parity
Ppt percentage point(s) q/q quarter-on-quarter Q1; Q2 first/second/third/fourth
quarter
REIT real estate investment trust r.h.s. right-hand scale WTI West Texas Intermediate
y/y year-on-year YTD year-to-date

Equity research

Frequently used abbreviations

CAGR Compound annual growth DCF Discounted cash flow EBIT Earnings before interest and
rate taxes
EBITDA Earnings before interest, taxes, EPS Earnings per share EV Enterprise value
depreciation and amortisation
FCF Free cash flow MV Market value PEG P/E divided by year-on-year
EPS growth
P/B Price-to-book value P/E Price-to-earnings ratio P/TBV Price-to-tangible book value
ROE Return on equity ROI Return on investment ROIC Return on invested capital
RoTE Return on tangible equity

Equity rating allocation as of 26/08/2021

Buy 45.4% Hold 52.4% Reduce 2.2%

Equity recommendation history

Please refer to the following link for more information on the current and 12-month historical investment recommendations made in
relation to equities covered by Julius Baer Research.
www.juliusbaer.com/recommendation-history

Rating system
Buy Expected to outperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise stated.
Hold Expected to perform in line (±5%) with the regional industry group in the coming 9-12 months, unless otherwise stated.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 18/22

Reduce Expected to underperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise stated.

Frequency of equity rating updates

An update on Buy-rated equities will be provided on a quarterly basis. An update for Hold and Reduce-rated equities will be provided
semi-annually or on an ad-hoc basis.

Risk rating system

The risk rating (High/Medium/Low) is a measure of a stock’s expected volatility and risk of losses in case of negative news flow. This
non-quantitative rating is based on criteria such as historical volatility, industry, earnings risk, valuation and balance sheet strength.

MSCI ESG Rating

MSCI ESG Research provides in-depth research, ratings and analyses to support companies' and government's efforts in terms of envi-
ronmental, social and corporate governance (ESG). MSCI ESG Research Intangible Value Assessment (IVA) Rating (MSCI ESG
Rating) provides ratings of companies' investment risk and opportunities which are not generally detected by traditional research
methods. There are three steps to the method: 1) identification of key issues for each sector 2) evaluation of risks and how they are
handled within the company 3) drawing up ratings to qualify the ESG risks not identified. The MSCI ESG Rating is expressed on a
seven-point scale and they range from CCC (worst) to AAA (best).

Equity strategy research

Countries, sectors and investment styles are rated ‘Overweight’, ‘Neutral’ or ‘Underweight’. These ratings are based on our expecta-
tions for relative performance versus regional and global benchmark indices.
Overweight Expected to outperform regional or global benchmark indices in the coming 9-12 months, unless otherwise stated.
Neutral Expected to perform in line with regional or global benchmark indices in the coming 9-12 months, unless otherwise stated.
Underweight Expected to underperform regional or global benchmark indices in the coming 9-12 months, unless otherwise stated.

Equity investments are divided into three different risk segments. Risk here is defined as the historical five-year volatility based on
monthly returns in CHF. Based on the data of all segments considered (developed markets, emerging markets, global sectors, invest-
ment styles) the following distinction is made:
Conservative Investments whose historical volatility is in the bottom quartile of the universe described above.
Medium Investments whose historical volatility is in the middle two quartiles of the universe described above.
Opportunistic Investments whose historical volatility is in the top quartile of the universe described above.

Next-Generation-Research

Structural exposure scores

Companies are analysed to determine their exposure to one of the Julius Baer Next Generation (NG) themes and are assigned with a
structural exposure score (‘Next Generation score’, ‘NG score’, or ‘thematic exposure score’). The score provides a comprehensive as-
sessment of whether a company is projected to benefit from or be threatened by structural change and ranges from -3 to +3, whereby
the top two scores are associated with thematic leaders, while the bottom two are associated with thematic laggards.

+2 and +3 Thematic leaders: the businesses of these companies should strongly (+2) or very strongly (+3) benefit from the identified
structural trends, leading to above-average or well-above-average sales and earnings growth as well as resulting in significant
market-share gains versus its competitors.
-1 to +1 The businesses of these companies are unlikely to be affected strongly by the identified structural trends, causing minor head-
winds (-1) or tailwinds (+1) to sales and earnings or having hardly any impact (0).
-3 and -2 Thematic laggards: the businesses of these companies should be strongly (-2) or very strongly (-3) threatened by the identified
structural trends, leading to below-average or well-below-average sales and earnings growth as well as resulting in significant
market-share losses versus its competitors.

Thematic rating
The Next Generation research team maintains a thematic rating on all of its themes under coverage, which outlines its current assess-
ment of the theme’s attractiveness from an investment point of view over a twelve-month horizon:
Bullish Strongly positive expected returns at the upper end of historic norms, i.e. >15% for benchmark equity investment themes and
>30% for more volatile and higher-risk themes.
Constructive Moderately positive expected returns that are in line with historic norms, i.e. around 7.5% for benchmark equity investment
themes and around 15% for more volatile and higher-risk themes.
Neutral Flat expected returns subject to ranges between +/-10% for benchmark equity investment themes and +/-20% for more volatile
and higher-risk themes.
Cautious Moderately negative expected returns, reflecting a consolidation, i.e. around -7.5% for benchmark equity investment themes
and around -15% for more volatile and higher-risk themes.
Bearish Strongly negative expected returns at the lower end of historic norms, reflecting a sell-off, i.e. <-15% for benchmark equity in-
vestment themes and <-30% for more volatile and higher-risk themes.
RESEARCH FOCUS | EXPLORING DECENTRALISED FINANCE (DEFI) | THURSDAY, 26 AUGUST 2021; 10:03 CET 19/22

DISCLAIMER

General
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