by Andrew Chalk
It seems that hardly a week goes by without some announcement connecting wine with the cryptocurrency concept called NFTs (non-fungible tokens). Well-known names associating their wines with NFTs include Château Malartic-Lagravière a Grand Cru Classé de Graves, Penfolds, Robert Mondavi, Domaine du Comte Liger-Belair in Vosne-Romanée, Burgundy, and Bérèche & Fils and Pierre Peters in Champagne.
Explanations for this consist of first, claims that NFTs make wine authenticatable. In a world where it has been estimated that 20% of high-end wine purchased in secondary markets is fake, this is an alluring goal. Second, it is claimed that attaching an NFT to wine enables the producer to capture some of the appreciation in value over time. Third, it is suggested wine could be sold with ‘merch’ attached if the wine were associated with an NFT. And fourth, NFTs could facilitate mementoes of memorable bottles and tastings.
The problem with all these arguments is that they are, with deference to those artistes of high culture, the Sex Pistols, bollocks. None of the advantages attributed to NFTs require NFTs. Some of the alleged advantages are not advantages at all. And other supposed advantages are irrelevant.
Why is this? Some of those who argue for NFTs are ‘talking their book’ (i.e. have a commercial interest in NFTs). Some do not understand what an NFT is and state the definition of NFTs without explaining how they came about. Some simply print stuff that is wrong.
WHAT IS AN NFT?
The formal specification of an NFT is ERC-721. That decodes as Ethereum Request For Comment number 721. It is an engineering document and every bit as arcane as the title sounds. However, it is where concept disputes are settled, so it is incumbent on anyone evaluating NFTs to know where to find this Single Source Of Truth.
Creation of an NFT (called minting) is not included in ERC-721 because it is prior art. The first stage is to create a digital certificate using the part of cryptography used to prove authenticity. An example: you may have been surfing the Internet and, when you tried to access a website, come across an error message saying that the site’s digital certificate is invalid (and asking you if you want to proceed). This is a scenario in which digital certificates are used to prove authenticity (in this case, of the website).
Cryptography, using complicated algorithms, creates the unique digital certificate. ERC-721 converts it into a unique value-pair by pairing it with an address where it is located. This value has to be stored somewhere. NFTs are stored on a blockchain. A blockchain is just a ledger. The implementation is more complex (it is a type of digital ledger), but conceptually it is the same as the ledger in a piece of accounting software. I.e., it is a sequenced list of transactions.
SO WHAT IS A WINE NFT?
On the blockchain the NFT, in everyday language, is a claim check on a specific bottle of wine. The physical proof that a given bottle is the one referred to in the NFT might as well be a Post-it Note stuck on the bottle carrying a QR code describing the NFT.
AN NFT DOES NOT GUARANTEE AUTHENTICITY
The NFT, the digital part, is unique. The blockchain can be interrogated to answer questions like what was that wine and who bought and sold it. The problem is, how is that connected to the bottle? The answer, in the case of physical objects like wine, is “not very reliably”. That expensive bottle can be emptied and replaced with plonk. Multiple bottles can be forged and each sold with a copy of the same Post-it Note identifier. The blockchain is pristine in its tracking of transactions but the physical bottle, as with other non-digital assets, exists off the blockchain. NFTs thus do not guarantee authenticity at all.
SO WHAT DOES GUARANTEE AUTHENTICITY?
There are two approaches to guaranteeing the authenticity of wine. Let’s describe each and then consider their pros and cons.
AUTHENTICITY APPROACH ONE -- MAKE THE BOTTLE IMPREGNABLE
One approach is exemplified by two real-world products. Both bow solemnly to the God of the NFT, but both in fact make NFTs irrelevant. Both create a tamper-proof seal.
vinID uses a tag that embodies a near-field communication (NFC) transceiver attached to the neck of the bottle. When the tag is moved, the NFC communications protocol transmits this information over the Internet to vinID and suitable movement can be interpreted as the bottle having been drunk or tampered with.
The Chai Vault uses a chip inside a plastic casing that is crimped onto the bottle. The chip contains 60 different data points about the wine. For example, images, markings, and serial numbers that are stored, all encrypted. I was unable to interview its inventor, Maureen Downey, in time for this article but presumably the data points could go beyond the merely observable. For example they could refer to the chemistry of the label, the bottle glass, or the wine itself. Possibly a limerick loved by the winemaker and customized for that wine. The important point is that the encrypted data on the chip (or rather a digital key generated from it) would be compared with the one in Chia Vault’s cloud database.
AUTHENTICITY APPROACH TWO -- PUT THE BOTTLE IN PRISON
The second approach is to never let the bottle leave the winery cellar, or that of a trusted third-party. For example, the London wine merchant Berry Bros & Rudd was founded in 1698, 78 years prior to the United States Declaration of Independence (presumably, to give the colonists time to buy their wine before battle). At several times in its history, Berry Bros has put its own reputation on the line to vouch for the authenticity of a wine or wines. The best known case may be its role as a bottler of Bordeaux for the UK market after the second world war when many châteaux were in dire financial straits and unable to do this on their own. I am unaware of any claim that they sold fake wine in the decades that they performed this role.
The formal name for this role in the crypto market is a custodian. The key requirements for the role are financial integrity, the incentive to monitor the wine, and solid financial foundations. The wineries themselves seem to me to be the ideal custodians, given their incentives to protect their brands, but have shown little appetite for the role thus far.
Under the prison system the wine would be sold, but the bottle would remain at the custodian. The purchaser would get a claim check. It could be an NFT, but that is not a necessity, as a guarantee of the wine’s authenticity. The assurance that it is real is that it is in prison.
The claim checks would be tradable and any owner could request the custodian to deliver. Once done, the claim check would be abolished (burned, in the NFT vernacular). If someone claimed to have this fine wine but had no claim check, they might be able to sell it, but nobody would buy it without knowing that it could be fake. The price would be severely discounted.
I thought the prison system was my idea only to be given the rude awakening that few ideas are truly new. The Australian company BlockBar partnered with Penfolds to auction their Magill Cellar 3 along these lines.
COMPARISON OF THE IMPREGNABLE BOTTLE AND PRISON SYSTEMS OF AUTHENTICITY
Ultimately, empirical evidence will decide which wine authentication system is more accurate. The impregnable bottle solution has the drawback that it is so expensive it can only be used for the most expensive wines. A more fundamental criticism comes from a career in IT and following news reports about the stunning scale and sophistication of wine fraud nowadays. How can one trust that bottle tags can keep ahead of the fraudsters? It seems the wrong approach to put the guarantee of security at the spoke of the wheel, rather than as the hub, which is where the prison system puts it (the hub being the winery or designated custodian).
Only if consumers have an insatiable desire to ‘hug and to hold’ their bottles will the prison system not be preferred, but that will be at the cost of a lower assurance of authenticity.
NFTs ARE NOT A BETTER WAY TO REWARD THE CREATOR
NFTs are described as a type of smart contract. That intriguing phrase (who would sign a dumb contract?) means that they are computer programs that both stipulate the terms on which the underlying asset can be transferred and enforce those terms when ownership of the asset takes place on the blockchain. This idea has attracted, particularly, works of art. As envisaged, the smart contract for an NFT could stipulate that X percentage of any appreciation in the price of the asset (since the last transfer) be paid to the original creator and not to the current seller. This provision was widely cheered when it was proposed (interestingly, there was a lot less attention to the question of whether the creator should share in any loss of value). The popular image was hoards of formerly starving artists rushing to order their next Bentley. Even if we accept the reasoning as correct (it is not), artwork (with the possible exception of Damien Hurst’s sharks submerged in leaking tanks of formaldehyde) is immutable, permanent. Wine ultimately deteriorates, so eventually depreciates, which makes the shared appreciation argument less compelling.
The decisive argument against the claim that shared appreciation payouts benefit the creator is that it is economically illiterate. The initial buyer will pay less for the wine up front due to the effective capital gains tax. To see this in stark relief, imagine that a law was passed that stipulated 100% of appreciation be paid to the creator. Would buyers pay as much as they would if the value were 0%?
NFTs AS BRINGERS OF MERCH AND PROVIDERS OF MEMENTOES
Château Angelus offered 3-D label art with its initial NFT. Robert Mondavi winery offered porcelain magnums by Bernardaud with theirs. These are examples of tying wine sales with merch. It is embarrassing to hear proponents try and explain these as a rationale for NFTs. They are marketing promotions, pure and simple, of the type that existed decades before NFTs, and may they continue.
Likewise, a memento of a great tasting has no requirement for NFTs. Certificates, gifts, even selfies have served this purpose amply without any need for NTFs
NFTs DO NOT USE ELECTRICITY
Austrian artist Chris Precht is an example of the perils of an artist pretending to be a climate expert. Apparently, he was distraught upon hearing that 300 pieces of his art that he planned to sell as NFTs “would have burned through the same amount of electricity that an average European would otherwise use in two decades.” Chris could just as well gone back to sipping his grüner veltliner because there is no necessary use of electricity with NFTs. The process of proof of work uses electricity and can be used to confirm transactions on a blockchain, but it is not necessary. The Ethereum blockchain, on which most NFTs trade, uses a different technique, proof of stake.
CONCLUSION
NFTs do not introduce anything to the wine world that it does not already have, except maybe more fraud as they are hyped. More generally, NFTs may be past their hype stage as prices crash. Realizing this, the legitimate merits of different methods of guaranteeing wine authenticity can take center stage.
When someone touts NFTs for doing something, ask them how it was done before. Likely, it was done before, so nothing new.
