NFTs and their Future in Wine

by Simon Pavitt

As the Chief Operating Officer of the London Technology Club – a club of over 90 Ultra High Net Worth individuals, venture capital firms and major financial institutions that invest in technology – we get approached by many entrepreneurs with opportunities promising the ‘next big idea’. Every now and then we get hit by a wave of very clever people all saying something similar, often driven by progress in technology coupled with an increase in clarity on what that technology could make possible…

Then in retrospect that shift gets given a name, such as the ‘sharing economy’ (think Airbnb, Lyft ride sharing and Lime scooters) and the gig economy (think Uber, Deliveroo food delivery, Fiverr for design and so on).

We are now in a phase called the ‘creator economy’: a software-facilitated economy that allows creators to earn revenue from their creations through many, normally digital, channels.

The creator economy was given a large shot into mainstream culture in 2021 with the birth of ‘NFTs’ as people began to get to grips with a new underlying technology. It’s hard to ignore a market that grows from US$100m in 2020 to US$21bn in 2021. In early 2022 we have been inundated with approaches about the practical uses and commercialisation of NFTs… many of them from the wine world or tech entrepreneurs with a passion project focused on wine (it helps perhaps that our offices are in the same building as fine wine club 67 Pall Mall in St James’s, London).

Here is a thought experiment to explain more…

NFTs Explained
NFT stands for non-fungible token. Put simply it’s a unit of data stored on a digital ledger (aka a blockchain). It is something that cannot be copied and is non-interchangeable. Example NFT data units include digital files such as photos, videos and audio clips. The data unit, referred to as a token cannot be copied as it is uniquely identifiable therefore it is like owning an original in digital form. An NFT can only have one owner at a time. So, what we have seen of late has been the likes of digital artists creating new pieces of digital artwork and selling them as NFTs. The most famous to date has been the artist Beeple selling an NFT via Christie’s auction house to a single owner for over $69m.

Someone can buy an NFT and own the work, just like an art collector can buy an original piece of physical art, and as it’s on a digital ledger, its origin is irrefutable. The fundamental power of NFTs is the authentication of ownership when transferring the assets in a transaction.

What’s also driving excitement is that an NFT can be sold and traded. Included within a trade is a smart contract or protocol. The original creator or owner can set rules that if their asset is sold onwards, they can receive a portion of the sale (a royalty) every time the asset is transfered to others. The sale or trade is recorded on the blockchain and therefore the sale transfer of ownership of that digital unit is authenticated. It is a certificate of authenticity that in theory cannot be hacked.

It has led to many people looking at what assets (especially scarce assets or collectibles) can be turned into digital tokens. ‘Minting’ is the process of tokenizing a digital file with cryptography. Tokenization is the process of turning an asset into a digital token that can be moved, stored and recorded on the blockchain.

Take the NBA basketball in the US. They realised that they had unique video highlights of what they called ‘Top Shots’.  The footage is digitized in a limited amount to create scarcity. It’s like with previous collectibles such as trading cards, consumers have fun collecting and exchanging scarce items. With digital assets there is no risk of damage and a reduced risk of theft… the NBA effectively still own the intellectual property and copyright and take a cut of every sale on the blockchain (and to date there has been over $600m in NBA Trop Shot NFT sales)… and for every single Top Shot moment that’s transacted there is a 5% seller’s fee shared (between Top Shot, the NBA and the National Basketball Players Association).

What many believe is a barrier to adoption is the nervousness about blockchain or crypto currencies. For example, Ethereum is the first blockchain to support NFTs and the most widely used. Just like there was a shift in consumer behaviour from buying in person to buying online, a new hurdle of trust will soon be overcome in terms of buying digital goods or NFTs just as easy as buying a t-shirt online. Don’t be fooled into thinking this is something just for ‘digitally-native’ early adopters nor niche Silicon-Valley crypto-tech startups… the big boy corporates are moving in. This was a mission statement from Mastercard recently “Currently if you want to buy an NFT, you need to open a crypto wallet, buy cryptocurrency and then use that to purchase your NFT. This is far from ideal from those who are outside of the cryptocurrency space. We want to change that…”.

NFTs are not small business. Nearly $41bn was spent on digital assets in 2021 by mid-December just on the Ethereum blockchain. To put into context, traditional global art market sales were estimated to be $50.1bn in 2020…

What is moving fast into mainstream now are NFT marketplaces (online platforms where you can create, buy and sell NFTs easily- often with just one click). The future is that digital assets such as NFTs will become as normal as traditional ones as people continue to move more and more of their attention and time towards a digital life… (think how normal it is for millions of kids to play in virtual worlds like Roblox and Minecraft). Not that there isn’t a healthy dose of scepticism and practices of what early adopters and crypto enthusiasts call ‘FUD’ (Fear, Uncertainty and Doubt) around the whole NFT space. Many believe the current conditions are symptomatic of the next unsustainable digital gold rush post the crypto currency craze. But on the other side of the coin, many believe everyone with an internet connection will own many NFTs by the end of the decade.

NFTs and Wine
How much of an impact will the digitisation of assets have in the world of wine? We believe NFTs (or some future version of) will enhance wine collecting, investing, drinking, experiencing and sharing. What we shall deduce, is that as the original creator, the craftsperson or the ‘minter’ could benefit the most…

This is best explained by thinking about the life of a bottle of wine….

We start with the winemaker. Let’s use the iconic Bordeaux estate Petrus as an example. Upon producing their (on average) 30,000 bottles of wine, the Chateau can create a digital twin for each bottle. Each bottle can be ‘minted’ as a unique digital token. The NFT is a digital document that can identify one true owner of the bottle of wine as a digital product.

The estate immediately has a database of every bottle of wine its produced for that vintage. It can add during the bottling process a tamper proof seal and tag system such as vinID that eliminates the threat of the original being drunk and refilled as well as counterfeited bottles. According to Sebastian Schier, Managing Director of vinID:

“The value chain should start with vintners. They are the best authenticator as well as the actual creator of the physical product. It is paramount that each NFT is immutably linked to a respective bottle of wine”.

The estate can hold the database of all the bottles it has produced. In the future anyone in possession of the bottle will be able to check that the bottle is authentic and, if allowed, see its history- for example how many times its changed hands on the secondary market. All information about the unique bottle can be immutably linked to the token. The NFT is an authentication of a certificate, a chain of custody of a bottle of wine.

Additionally, the NFT can be used to provide engaging content to the customer- from the supply chain that formed part of the making of the wine (cork, bottles, pesticides, methods- providing proof and provenance) to tailored content from the winemakers. What then is required is the interface between the digital and real world. These already exist. For example CollectID is a product authentication ecosystem online that allows users to easily authenticate and trade any product by simply tapping the smartphone on the item. Potentially in the future a vineyard’s own app could act as the interface between the digital and real world. The bottle’s owner can transfer ownership to someone else which then gets logged on the ledger, with the chateau notified for data insights.

According the Schier: “NFTs can give vintners visibility on the consumption and secondary market sales enabling them to gain back control over their very own supply”.

Solving a problem
A major challenge expressed to me by many of the top grand vin is that once the bottles leave their estate, they have limited knowledge of where they go – who they are sold to and when they are drunk.

A winemaker often has no way of knowing for example how many bottles of wine for each vintage are still in circulation or how to work out who owns or drinks their wine. NFTs are anonymous so it doesn’t mean the winemaker would know exactly who would be buying the wine unless they chose to reveal themselves (more on that later). But the data the winemaker would be gathering is powerful…

The second gripe of the top winemakers are they are not able to maximise the secondary market. Petrus is one of the most powerful brands in the fine wine world. When tracking the performance via the Petrus index (from Liv-ex), the price performance of the last ten physical vintages has risen over 350% since December 2003. Collectors, investors and speculators will have profited from buying and selling Petrus. The estate does not see any of this profit (of course it can hold back stock and release onto the secondary market so it’s not totally missing out). If however, each bottle was traded only via the digital token, the protocol would be that Petrus receives a royalty each time the bottle changes ownership.

This promise of royalties to the original creator is the bedrock of the ‘creator economy’ in the futur. As Elon Musk pointed out just this month, “it’s important for creators to have revenue share”. It’s driving many commercially-savvy owner and creator of assets to lean into NFTs. When explaining to a winemaker that they could not only receive revenues from the first sale but all future sales on the secondary market, the level of interest in this technology suddenly goes up…

Shifting to tasting tokens
This shift to bottles of wine being digital tokens may only work on a handful of situations, but they are important. For example:

• Bottles of wine authenticated at original source by the winemaker. Once that is proven to be authentic then the wine can be digitised. This means any new bottles going forward could be minted. Much has been written about the fake wine epidemic in the industry. It is currently a case of most not really wanting to know about counterfeiting or the wine’s true origins as they have something to lose by finding out that the wine they own/ are selling isn’t really as valuable as they thought. Going forward, on new tokenised bottles, the provenance can be irrefutably verified, a major step forward in wine fraud deterrence.
• Existing bottles of previous vintages that can prove authenticity (if from trusted sources). An example is Robert Parker minting bottles in his personal pristine cellar and selling for charity in an auction. Working with Legacy Cellar Foundation (a US-based donor-advised fund that allows wine owners to convert their collections into gifts for charities and causes). The first bottle was sold at a Robert Parker + ‘Sine Qua Non’ dinner in benefit of St. Jude Children’s Research Hospital. Robert donated a true ‘one-of-a-kind’ bottle, a 27L Goliath of Sine Qua Non 2003 11 Confessions. 100 donors each paid $30,000 to participate in the dinner and taste the wine at the sell-out dinner in Beverly Hills. One can assume that Parker has kept his collection in good storage conditions and he provides the stamp of trust, and the resulting NFTs can be trusted enough to be bought (and perhaps traded).
• Via trusted middlemen. For example, BlockBar, founded in just October 2021 is a platform that sells NFTs of marquee liquors including fine wine. The NFTs correspond to physical bottles straight from the producer. The NFTs authenticate the bottle, which is stored by BlockBar in a climate-controlled and bonded warehouse in Singapore. According to co-founder and President of BlockBar, Sam Falic “the platform is a true interface between the physical and digital world”. Consumers have the ability to exchange the digital version, which is blockchain-based and proof of authenticity and the right to have the physical bottle delivered. Rare bottle NFTs have already been successfully sold on the platform such as Penfolds Shiraz Cabernet. BlockBar’s fee structure is simple: collectors receive 90% of their selling price (the 10% is split between BlockBar and the Brands), no additional fees are charged for storage or insurance. Ownership on the blockchain can be tracked all the way back to the producer itself. The NFT is easily tradeable on the BlockBar marketplace.

Others such as 1275 Collections in Switzerland design and build fine wine collections with fully traceable provenance. Their Internet of Bottles™ technology protects the wine and documents every moment of its live- providing certainty about conditions. Every bottle and case is fitted with an RFID chip that monitors temperature and GPS location for enables tracking of storage and transportation,

The 1275 mobile app enables the owner to easily view and manage their collection. NFTs will offer such Clubs the next level in their ability to track, trade and leverage an enthusiast’s collection even more.

Technology companies are also looking at enabling the winemakers to white label their own exchanges in the future. Imagine in the future if you wanted to purchase Petrus, you could go to their website and trade NFTs knowing that the winemaker has full sight of all bottles, sales (and royalties from secondary sales). Provenance Technologies, led by Nolan Andelin are looking at just that… for many luxury items not just fine wine. They are finding NFTs are enabling new use cases in troubled times… Provenance Technologies received the green light to work on behalf of the brewery in Ukraine in order to produce and sell a NFT project with the proceeds going to the employees of the company and to help continue their production of bottled water for the citizens of Kyiv…

Think also that high priced items could also be divided up… a highly sought-after bottle of wine doesn’t have to have just one owner… the likes of Mintus are fractionalising luxury items- firstly the world’s greatest art, unlocking the fine-art market for investors. How about owning a twentieth of a bottle of DRC? Something you might have only dreamt of doing, now you can through digital contracts…

Life after drinking the bottle
When a physical bottle is drunk the twinned NFT is ‘burned’ (prohibiting a future change of ownership). We go back to earlier in the process where the winemaker has added a tamper proof seal that notifies the owner and original creator that the bottle has been opened. Again, the benefit to the winemaker is that they are alerted and can see in real-time how many bottles of various vintages have been opened vs remain to be enjoyed… of course also, clarity and proof on how many bottles of certain highly desirable wines are left still to be consumed means some, when getting low, become more desirable and therefore increase in value.

Utility Wine NFTs: a New Era of Ownership
Originally NFTs were seen as speculative assets, but many questioned their usefulness or long-term value. Yes, there may be some cultural value having something that is limited-edition even if something is just created to get consumer attention/ publicity. But there is the potential for commercial value, assuming the NFT can be resold if the market determines the value has increased. It is certainly wrong however to assume that NFTs will all automatically go up in value.

Those minting NFTs quickly realised there are things NFTs can do to provide more value: Utility NFTs. Creators and developers realised they could add redeemable rewards or unlock access to ‘membership’ style experiences to create more value associated with the ownership. The underlying technology certainly allows this, the owner of the NFT is irrefutable. When ownership can be proven, exclusive benefits to the owner can be provided. Utility NFTs are designed to provide additional value that can be unlocked when required (many in the hope that the value of the NFT remains as it continues to provide perks, access and unique benefits to the owner). Utility NFTs have become important for both the creator (in our case winemaker) and the owner. Just owning an NFT bottle of wine is ok, but if by owning that bottle, you unlock additional perks that only you as the owner can regularly unlock… it drives even more value of ownership. Communities of ownership can be built, nurtured and supported.

Utility NFTs could be used to unlock more value and drive increased engagement with the maker’s communities. Unlocking experiences for owners drives increased loyalty for a particular winemaker for instance, or serve as a way of fuelling advocacy, word of mouth or amplification. Many winemakers are sitting on archives of media footage, audio files, unseen imagery and of course access to previous vintages in storage that they can provide as part of the ownership of an NFT they have minted… NFTs offer the potential to monetise beyond just the wine contained in the bottle…

Utility NFTs can be not just to unlock perks but to also educate. Whether that’s about the supply chain or unique production methods to educating the owner about the fact that the product is worth storing safely, maturing and protecting.

Taking as an example, SGC wine, already one of the world’s most disruptive wines which has revolutionised the industry by creating a scientific ranking system that goes head-to-head with the 1855 Bordeaux ranking, by doing high tech soil analysis. Already pioneers in their field, they could soon include educational content via NFTs that include the secrets of the soil properties where the vines producing their exceptional wine are grown. This information could extend to valuable insights as well as offer a guarantee of their sustainability practices which involve the use of probiotics that naturally invigorate the vines and make the use of any pesticides or chemicals redundant. The NFT space is one naturally suited to a fearless vision, embraced by the likes of SGC that has set out to question existing winemaking conventions.

Digital Corks
Winemakers are already thinking about what happens when a bottle is opened and consumed. There can be tags on the bottle to alert that the bottle has been opened. This tag is again links digital to real world as a ‘digital cork’. The owner of the bottle could have their digital cork converted into a collectible, unique digital artwork that can also be sold, traded or displayed as a keep sake of the experience. Potentially, the rarer the bottle, the more valuable the associated digital artwork.

There has always been a rich association between wine and art. And NFTs continue to bring the two together. Tristan Le Lous, owner (with his family) of Château Cantenac Brown is breaking new ground with an ephemeral, raw-earth fresco sold as an NFT. The winemaker is constructing a one-of-a-kind raw earth cellar set to be complete in 2023. Tristan has commissioned a piece of biodegradable artwork by Finnish artist David Popa.  Built entirely from their Margaux third growth soils, the transient fresco will be created at the estate in early summer 2022, and will wash away with the first rain thereafter. The temporary artwork, entitled “The Power of the Earth” will be preserved as a video, and auctioned as an NFT – all proceeds will be donated to the Conservatoire du Littoral, a French natural conservation organisation.

Building Commuity
Club dVIN brought to me the idea of the Digital Cork. The Club, founded by tech serial entrepreneurs David Garrett and Behdad Shahsavari, launched in 2022, is a unique community of experts, winemakers and once-in-a-lifetime experiences. Their belief is that NFTs are not just for ownership, but for sharing…

Once the bottle is opened, there are two main utilities:

1) It creates a unique artwork that is owned by the bottle owner…

2) the owner of an opened bottle has the ability to mint up to 12 Tasting Token NFTs that can be easily given to the people who shared the tasting experience.

Tasting Tokens serve as a Proof of Experience. They contain all of the important information about the particular wine, and holders can add additional media and information – like a picture or video of the event, and tasting notes for the wine. Holders can share their Tasting Tokens on social media and collect them as a tasting journal. The journal can be visualized on a map, timeline or organised by the people you shared the experiences with. The NFTs allow you to remember and relive amazing wine experiences and connect with other wine lovers and collectors… As the taster accepts the token in their wallet, the vineyard gets notified enabling it to be able to track the bottle… You can see wine enthusiasts looking to be the first of their friends to collect a 10-year vertical of Domaine Dujac, or one of each of the Bordeaux first growths.

This again is happening already, Club dVIN provided the tasting tokens for the Robert Parker + ‘Sine Qua Non’ dinner we mentioned earlier. All 100 participants received a special Tasting Token for the 27L bottle as well as a Club dVIN Genesis membership token.

Club dVIN have chosen to place their NFTs using Rarible. Rarible is a marketplace which includes digital artworks, memes and parcels of virtual land. Other notable marketplaces include OpenSea (another platform lets users buy and sell NFTs on the secondary marketplace and also create their own NFT collections to sell on the primary marketplace).

Winemakers or communities/ clubs in the future for example reward those superfans that manage to taste certain wines for example, complete a 5-year vertical tasting of Petrus, and earn an invite to visit the winery and taste with the winemaker… irrefutably proven that the person tasted the wines via the NFT tasting tokens. All the super fan needs to do is show the winery its digital wallet to prove the tasting… Collectors may switch from wanting to own wines to wanting to collect experiences of tasting wines… targeting digital tasting ladders of cult wines?

In essence the role of NFTs can switch from authentication and royalties until a bottle is opened and then to experiences and emotions (such as a gateway to brand understanding and loyalty)… powerful potential…

Digital Wine Cellar
Moving on another level… Just as with digital art NFTs, those with ownership want to display their digital assets. So, what’s quickly developed in digital art now are digital museums to allow others to see one’s collection. Artists and collectors want to show their NFTs in fully immersive experiences for free. There are builders out there currently providing platforms to allow owners to have a space to give life to their digital assets such as collectables. An example is the 6529 Museum District that will house multiple online NFT museums… without going down this rabbit hole, this is an example of a metaverse… but what is interesting for fine wine is that the same could be applied to an owner of many NFT wine assets… A digital wine cellar where you could explore the owner’s wines. In the future, collectors or investors would have the ability to sell bottles from their collections, from inside their digital cellar. I’d love to see what is in Robert Parker or Jane’s personal digital wine cellar…!! Again, it can become a way of something signifying someone’s interest or passion for fine wine.

A New Audience
There are many reasons to lean into understanding NFTs… it is becoming mainstream especially with younger generations, opening up the potential for forward-thinking brands wanting to engage with affluent younger, digital/tech-savvy consumers… Understanding some of the ‘lingo’ helps frames where the future is heading… Already in NFT world, there is already a sorting of ‘blue chip’ NFTs vs the rest… But the vocabulary is potentially off-putting/ feels more counterculture than more mature, trusted wording… but lean in… here goes, to show you are down with the kids:

There are a set of ‘OG’ (original gangster) NFTs that refer to those that were in the space early and earned respect from the NFT space. These are considered to be very scarce and desired by collectors. What if fine wine in the future had the same? Just as fine wine has its cult wines and premier cru classés.  Within blue chip NFTs- there are three levels:

• OG NFTs – say 20,000 pieces globally
• Grail NFTs – say 2,000 pieces (10% of the above)
• Ultra-Grail NFTs – say 200 pieces (1% of the above)

Imagine in the future if the most sought-after fine wines have their own system of OG, Grail and Ultra-Grail fine wine NFTs? The same collectors that desire bottles of fine wine, ultra-grail NFT fine wines could be scarce and desired by collectors…

I believe we can expect to see vocabularies changing as NFTs may well be repackaged or become the basic form of the underlying tech that people don’t really need to know how works, but more wordsmithing, packaging, wording and marketing could take over to enhance the trust factor and adoption of NFTs…

This is a hugely exciting opportunity for the wine industry- especially for the winemakers. Time to start thinking about the fine wine utility NFTs and Ultra-Grails…!

 

With thanks to Simon Pavitt.