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What are NFTs?
It seems like it happened yesterday. NFTs - Non-Fungible Tokens have sprouted in the art world to become a market worth more than a quarter of the value of the US wine trade. All of a sudden, NFTs are everywhere. Non-fungible tokens such as digital certificates of ownership and authenticity that can be applied to literally any object from a racehorse to a plate of virtual sushi – hit the front pages in March when Christie’s sold an NFT of a digital work by the artist Beeple forUS$69.3m. NFTs continue to be the realm of the crypto-geek and one wonders of its possible applications in the wine industry.
NFT simply speaking is the acronym for non-fungible token. In other words, it’s a unit of data placed on a digital ledger also known as Blockchain. NFTs are uncopyable and not interchangeable. Popular NFT's data units include media files such as photos, videos and audio clips. The data unit, or the token, cannot be copied as it is uniquely identifiable akin to owning an original in digital form and can only have one owner at a time. In 2020, according to Dappradar, global sales ofNFTs attained close to $95m.Last year, that figure went to a staggering level of $24.9bn, or the equivalent of over 28%of Business Wire’s estimate of the value of the entire US wine industry.
The Trading platforms of wine NFT’s
Wine NFTs are traded on digital NFT platforms such as BlockBar, WiV, and VinoDex. Winemakers attach NFTs to physical bottles or barrels of wine and put them up for sale on a market platform (in the form of digital tokens). These digital tokens contain a wine’s complete technical information fostering an environment where the transactions can be quickly safely realized and the ensuing NFT's are held in digital ledger also called blockchain, a trustworthy transaction diary . Presently blockchain technology is being applied to other tangible goods such as art, watches and luxury vehicles .In the blockchain, NFTs carry with them certificates of ownership and authenticity which ensures they are not hacked or cloned. Although digital items can be infinitely replicated and copied, this is not the case with their certificates of ownership and authenticity. Hence, this feature is what gives NFTs their true value.
Blockchain Technology
Due to their transactional decentralized form of recordkeeping, wine industry insiders contend that blockchain technology could completely eliminate fraud in the wine industry. When a wine is sold on the blockchain, the information is transmitted to an NFC system. For a new consumer encountering the bottle, a quick scan by the smartphone lens can tell if the bottle has been tampered. Then, the blockchain company applies due diligence to ensure the provenance,authenticity, integrity of every bottle of wine. Statistics state that Blockchain could prevent fraud and customers are willing to pay a premium for it.In addition, what's driving excitement with NFTs is that they can be sold and traded with 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 transferred to others. The sale or trade is recorded on the blockchain and therefore the transfer of ownership of that digital unit is authenticated. It is a certificate of authenticity that in theory cannot be hacked.
Blockchain technology has the potential to streamline the wine industry.Current blockchain platforms seek to resolve supply chain inefficiencies, quality and certification issues, and prevent counterfeiting. In addition, Producers could benefit by tracking wine shipments across every layer such as brokers/négociants, importers, wholesalers, distributors,retailers and auction houses in an efficient decentralized manner to verify authenticity and reduce time, costs, labor and waste across the supply chain.
Wine industry insiders state that the most important wine Blockchain was the one implemented by Chai Vault, run by Maureen Downey, global wine-fraud guru and founder of Chai Consulting authentication.
The company became famous in the wine forgery scandal of Rudy Kurniawan. Maureen anticipated the need for pristine records of wine provenance at the bottle level and made work using blockchain technology to achieve this objective. The company patented the Chai method which is a combination of proprietary anti-tampering hardware with an online Ethereum blockchain-secured system that securely keeps fine-wine information, including traceable provenance ownership records, high-resolution photographs, and Downey's 90-point authentication system.
The advantages of NFTs
A successful example of the application of NFT’s in the digitalization of fine was the premier partnership of cult wines with fabled Chateau Angelus. Cult wines released an NFT artwork in collaboration with Bordeaux Grand Cru ChâteauAngelus. The NFT featured a 3D animation of the estate signature bell that appears on its label. The NFT gave owners an exclusive rig to one barrel of Chateau Angélus, Premier Grand Cru Classé A, Bordeaux 2020. A purchase of a ChateauAngelus NFT also grants you a virtual tasting with Chateau Angélus CEO with the Co-Owner, Stéphanie de Boüard-Rivoal, and a stay at the acclaimed Logis de la Cadène in France.
Moreover, the introduction of NFT’s in the global wine industry accelerates the democratization of wine and could make investing in wine an even more attractive opportunity. Currently, wine is considered to be an attractive investment alternative with consistent historical returns According to Vinfolio.com, blue chip grade wines have seen a compound annual growth rate in the 10-11% compared to 9-10% from the S&P500 for the last 35 years Even during recessions, the fine wine market generally experiences less lower returns compared to the stock market. Furthermore NFT’s allow equitable trading opportunities in tech friendly marketplaces, decentering the focus of expert wine trading sites. Finally,NFTs are not small businesses. For example, close to $41bn was spent on digital assets in 2021 by mid-December just on the Ethereum blockchain. To put into a context, traditional global art market sales were estimated to be $50.1bn in 2020.
Another advantage of NFTs is that they attract a younger generation of wine drinkers. As millennials mature with better economic means, they enjoy more opportunities in fine wine markets. According to Jamie Richie, Global Chief ofOperations at Sotheby’s, the auction house is getting more bids from 30-40 years old collectors compared to 1990’s when the average age was 65. This points to a gap trend between them and the baby boom bygone era. Millennials enjoy ondemand wine assets with gimmicks such as exclusivity and attention to detail to wine artisanal products. For instance,wine platforms such as tasty.com are able to match consumers with the products they love accordingly. According to luxury marketing consultancy VitaBella, "NFTs will be a way for fine wines to find a new source of growth with younger generations. No one can ignore it,” he emailed. “When traditional wine estates understand this, the market will explode.But good platforms have to be set up and launched.”. On the other hand, some are skeptical. For instance, Robbie Stevens argues that Nft's are probing the market to see what technology works and what does not.
Another benefit is that when a physical bottle is drunk the associated NFT is ‘disposed’ (prohibiting a future change of ownership). The process consists in where the winemaker adds 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. This ensures clarity and proof on how many bottles of certain highly desirable wines are left still to be consumed to estimate demand for desirable wines.
NFT's and cryptocurrency go hand in hand but one wonders if it will work with wine NFT's. According to 4th generation Mondavi family winemakers, the combination might be the future for the wine industry. The position is corroborated by Acker Wines, America’s oldest wine merchant and the world’s largest fine and rare wine auction house. The boutique wine specialist has been accepting crypto payments since April 2021. This enthusiasm is shared as well by the Italian Wine Crypto Bank (IWCB),the first and only global wine bank based on blockchain and cryptocurrencies. According to the Italian financial institution, the coin called IWB is a revolutionary utility token tradable through Latoken exchange on the secondary market backed with Italian wines. The institution has partnered with some prestigious Italian wineries such as Allegrini, Arnaldo Caprai, Tua Rita and Mazzei.
However, one major drawback that could impede NFTs to become mainstream in the global wine industry is its high environmental costs of production. For instance, in order to verify cryptocurrencies like Bitcoin, all of the supercomputers used to ‘mine’ them have to collaborate to solve mathematical equations requiring a lot of electricity.For example, according to the Cambridge Center for Alternative Finance (CCAF), Bitcoin alone currently consumes awhoppering 130 Terawatt Hours per year , more than all of the energy of Ukraine or Norway, or the whole electricity in US homes. The best way for NFTs to become green is that they run on renewable energy but this raises the ethical question if solar energy is better employed to heat homes rather than currency or luxury artifacts.
In conclusion, no one can dispute the reckoning force of NFT’s blockchain technology in the market today. The potential to eliminate fraud and counterfeiting combined with the saving distribution costs makes a very interesting economic proposition. However, one wonders if there are other alternative ways to reap the full benefits of NFT’s. The technology isin its earlier stages and it seems a bit frightening. Certainly, younger wealthy wine consumers will continue to jump in the NFT wagon with the more traditional wine consumers taking a back seat. Time will tell if NFT’s will become mainstream in the wine industry.
References:
- 1- “What’s the Deal with NFTs and Wine?” Club Oenologique
- 2- Anson, Jane. “NFTs and Their Future in Wine.” Jane Anson | inside Bordeaux | Janeanson.com, 8 June 2022.
- 3- “NFTs and Wine - the Long Read | Meiningers Wine Business International.” Www.wine-Business-International.com. Mars 2022.
- 4- “NFT in the Wine Industry.” Future Drinks Expo. Accessed 26 Nov. 2022.
- 5-“Authenticating NFT Wine with Blockchain.” Laava Smart Fingerprints, 21 Feb. 2022.
- 6- Shaw, Lucy. “Cult Wines Partners with Angélus on NFT Artwork.” The Drinks Business, 14 July 2021.
- 7- Jenssen, Mike DeSimone and Jeff. “NFTs Have Arrived in the Wine Industry.” Forbes.
- 8- Staff, Vinfolio. “What Returns Should You Expect from Your Wine Investment?” Vinfolio Blog, 25 Feb. 2022.
- 9- “Can Tech Bridge the Gap with Millennial Wine Consumers?” SevenFifty Daily, 10 Oct. 2022.
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