The Wine Industry is Now Ready for Blockchain Disruption via DeFi and NFTs

Back in 2017, I wrote about why blockchain will change the wine industry. At that time, Bitcoin was surging to new highs and the idea of corporate blockchains was in full swing. It looked as if every industry would get disrupted byblockchain technology.

Since then, the Bitcoin use case has strengthened as evidenced by the growing institutional adoption and price run over the past year, but for the most part corporate blockchains have been a failure — there has just been a lack of product-market fit for most use cases.

In order for any new technology to succeed, there must be product-market fit. Users have to see real value in moving to a new model, especially one that is more technically sophisticated than the familiar solutions that exist today.

Two areas within blockchain technology have emerged with true product-market fit: Decentralized Finance (DeFi), and Non-Fungible Tokens (NFTs). The combination of these two areas is where things get really interesting and why I believe we now have a compelling use case for the wine industry.

I won’t go into all the details on DeFi and NFTs, but you can read more here and here.

I will start by outlining some challenges within the high-end, collectable wine market and offer a framework for a solution built on a public blockchain, using concepts of DeFi and NFTs. Like many disruptive technologies, it often starts with a niche market segment (in this case high-end, collectable wine) and then moves to the more mainstream market.

For those who are into collectable wines, the names Screaming Eagle, Sine Qua Non, and Harlan Estate are likely familiar. These wineries have waiting lists of 10+ years just to buy the wines at the “winery released price” (WRP — I will come back to this shortly).

A large percentage of the buyers of these wines never drink them — they are held for investment or collection purposes and later resold at auctions or various online exchanges like WineBid.com. Here is where we encounter challenge #1 —high transaction costs and lack of liquidity (pun not intended).

Wine auction houses can charge up to 15–30% of the sale price in fees to buyers and sellers. On top of that, it is often time-consuming and expensive to pack and ship wines to these auction houses and wait for the settlement after the auction ends. The end result is a very inefficient market for most wine collectors.

I am personally sitting on some collectable bottles that I would like to sell, but the market barriers are too high for me to bother, so I am forced to HODL with no mechanism to do otherwise.

A second challenge goes back to the winery released price (WRP). Most wineries will try to set their prices according to market demand, but many sought-after wines command a significant secondary market premium. Certain wines can be purchased at the WRP and immediately resold at a higher price. In some cases, people sell the “rights” to buy wine from these wineries to people who are not fortunate enough to be on the list.

All of this excess premium and secondary market activity is lost value for the winery. You can think of this as somewhat analogous to an IPO where the company sets a price of say $20/share and then it opens up for trading on the exxchange at $50/share — the true market value was $50 and that extra $30 went to the bankers and the lucky investors who were “on the list” for the IPO.

This is where the concept of DeFi comes in — a better solution to solve for market inefficiencies. Several of the core principles of DeFi can address these challenges:

1. Decentralization — no “middleman” entity has the power to set prices or control the supply/demand mechanisms.
2. Transparency — all transactions are visible on the public blockchain thus enabling efficient price discovery.
3. Immutability — all transactions are securely recorded and cannot be tampered. Think about the benefits for wine provenance.
4. Composability — highly programmable smart contracts that can create entirely new market transaction mechanisms.

So what would a collectable wine market look like after applying the principles of DeFi?

Imagine that a winery can issue tokens to members of its mailing list each time a new release of wines is ready — let’s call this the $WINE token.

The token is minted on the blockchain and the mailing list members purchase the tokens. The token holder can then redeem it for wine at a later date. This effectively replaces the archaic “mailing list” concept that wineries use today.

If the holder of the token decides to sell it, rather than redeem it for the wine, there would be a decentralized exchange for this to occur and thus a more formal market with price discovery compared to what exists today. But, this still doesn’t add much value to the winery… yet.

Using the composability inherent in the blockchain with smart contracts, what if every time these tokens traded on the open market, the winery received a percentage, let’s say 5%, similar to how some NFT pieces of artwork are designed with a royalty structure back to the original artist. So someone holding a token for a case of Harlan Estate Cabernet Sauvignon sells it on an exchange for say 5 ETH (worth approximately $9,000 today), the winery would receive 5% of the 5 ETH (or $450).

As long as the tokens have not been redeemed for the physical wine (at which time the tokens would be “burned”), the winery will earn the transaction fee every time the wine trades hands. This would represent an incremental revenue stream to the winery and a more efficient secondary market system for all participants due to the added liquidity and price discovery.

The sellers of the tokens also benefit as they are able to create liquidity without having to worry about the physical complications of storing and shipping wine. The buyers benefit from the provenance on the blockchain and the flexibility of either reselling or taking possession on their terms. This would radically open up the wine market as an investable assetclass.

But wait, there’s more! This is where we need to bring in the concepts of NFTs.

The idea of an NFT is that it represents a “one of a kind” asset in the digital world. Those in the wine collector community know that everyone loves to show off those special bottles in the cellar or brag about the amazing bottles they have tasted. What if NFTs give people the chance to show real proof?

Bear with me, because we’re just scratching the surface of the use cases. Let’s go back to the winery because we’re not done adding value for them, and since they control the product this is where we need to start with a compelling use case.

Once the $WINE token is redeemed (and thus done trading on the secondary market), the holder of the token takes possession of the wine plus receives an NFT from the winery.

The NFT could have an image of the bottle with a unique identifier for the specific bottles purchased, providing clear provenance for the underlying wine. Wine fraud is a $3b issue in the industry and there has not been a great solution introduced to date — why not introduce a solution that makes it more interesting to the holder of the wine via an NFT?

These NFTs may have some value as a collectable item depending on the scarcity of the wine (you can imagine that Screaming Eagle 2020 Cabernet Sauvignon bottle #1 as an interesting collectable), but it can go much, much further.

Using the property of composability, what if some of these NFTs unlocked special experiences — access to exclusive tastings at the winery, special offerings from the winery like a bottle signed by the winemaker, etc. Now wineries would get a new channel for creative expression to develop experiences that go with their wines, thus making the tokens more valuable and tradeable, and the entire experience would be gamified for the consumers.

Once the $WINE token is burned and the holder receives the wine and NFT, there can still be a healthy secondary market. If the holder of that wine wants to sell, the NFT provides proof of ownership and provenance. This could allow wine storage facilities to inventory wine and release bottles upon proof of the NFT, at which point its movement is recorded on the blockchain enabling full transparency for future buyers.

The NFT could also have a royalty back to the winery such that if the NFT is sold along with the wines, a % of the transaction goes back to the winery. There is plenty of room to create economic value when you’re disrupting the 15–30% transaction costs imposed by the middlemen in the current system.

There are some new platforms like VinoVest that allow investors to gain exposure to wine as an asset class, but they are all based on traditional financial structures and do not encompass the game-changing features of DeFi or NFTs. They do not bring any incremental value to the wineries (the creators of the product) or do much to enhance the experience for the consumers. They are simply a new middleman with a shinier jacket.

This is just one example of a full-circle micro-economy that can be created using blockchain technology to deliver more value to all participants. There are many different permutations of how this could work and the use cases that could be unlocked — we are just beginning to scratch the surface. There is no reason why this couldn’t be extended to the non-collectable wine market, using NFTs as a way to create product differentiation and marketing buzz.

Of course, ideas are easy and execution is hard. The biggest challenge is that the wine industry is not the most technically sophisticated. For this to work, the on-ramps and off-ramps of tokenization would need to be made extremely simple, the UI design would need to be much more intuitive than what exists in DeFi today, and the ecosystem would need to be well managed. The bridges between physical goods and digital experiences will become a major industry in itself, but I look forward to it!

Cheers!