Could NFTs Really Disrupt the World of Fine Wine? In Conversation with David Garrett and Behdad Shahsavari
In the past few years, the world of fine wine has spoken a lot about blockchain, seeing it as a potential solution to the problem of counterfeiting. But as it turns out, blockchain was only the beginning. Now come the non-fungible tokens, or NFTs. Pauline Vicard, the CEO of ARENI, sat down with digital strategist Behdad Shahsavari and tech entrepreneur David Garrett to discuss their new venture, Club DVin. This wide-ranging conversation starts with understanding NFTs, and ranges over how both producers and collectors can benefit.
Following is a shortened and lightly edited version of the conversation. The whole discussion is available on the podcast.
ARENI
In 2021, an artist from Wisconsin known as Beeple made international news when a piece of his digital artwork sold for $69 million dollars at Christie‘s, a record-breaking amount paid for a new category of assets called non fungible tokens, aka NFTs. Like most stories related to blockchain and cryptocurrency, this one seemed to bring up more questions than answers. What do NFTs actually do? And if you buy one what, exactly, do you get? What is it worth? And more importantly, how do they relate to the fine wine world? I’m very excited to have David and Behdad, the co-founders of a new company called DVin, to talk about this. And my first question for you gentlemen is, what are NFTs?
Behdad Shahsavari
The phrase itself, non fungible token, implies the existence of the opposite, which is a fungible token. It was designed to facilitate transactions without an intermediary. You typically need two things: something of value that you are exchanging, and a contract around that value. And that’s what both fungible tokens and non fungible tokens do. The fungible token piece is the means of exchanging value: crypto currency, Bitcoin, Ethereum, whatever it is. And those are fungible because every token is effectively equivalent to every other token in all aspects, with the exception of the serial number, just like a dollar is a dollar or a euro is a euro or a pound is a pound. They all have serial numbers for security, safety, tracing, authenticity, but they’re all equivalent.
The contracts, however, are not fungible. My contract with David to buy his car is different than my contract with you to buy your car, both in shape, form and content. And those are NFTs.
The way NFTs are talked about now is in association with digital art, but you can attach whatever you want to an NFT, whether that be actual images or links and metadata.
ARENI
So, in some way, fungible means replaceable, right? So, what is special about NFTs is that they’re unique.
Behdad Shahsavari
Fungible means one-to-one exchangeable. It’s a perfect substitute. But one piece of art is not a perfect substitute for another piece of art. Picasso is not fungible.
ARENI
If I understand that correctly, it‘s not just the currencies, it’s the contract, which is attached to the NFT.
Behdad Shahsavari
It effectively means that it’s automatically executed. We don’t need an intermediary or a third party, we don’t need a lawyer. We don’t need someone to manage escrow and hold the funds. The contract is set up with a global standard. According to the platform that it’s on, there will be one contract. And as soon as you and I both agree that we’re going to make this transaction, then the contract is executed.
ARENI
What money, or currency, do we use? Do we use Bitcoins or whatever cryptocurrency, or can we use pounds and dollars and euros?
Behdad Shahsavari
It hast to be transacted in cryptocurrency if you’re doing a blockchain transaction, but you can have a near seamless exchange of fiat currency* for crypto. Depending on how you set up your platform for commerce, your buy button can display different currencies. There’s always going to be equivalence. Even if you’re buying it in Ethereum, you can see what that value is at the moment in dollars or euros or pounds if you want.
ARENI
The beauty of that is that I don’t need to be a specialist of cryptocurrency at all. As you were saying, if that costs a hundred dollars, I don’t really care how much cost in Bitcoins or whatever.
Behdad Shahsavari
You do need a crypto wallet, which is capable of storing cryptocurrency and transacting with it. That process used to be fairly clunky, but it’s getting smoother every day. There are new implementations that are simplifying setting up a cryptocurrency wallet, transferring fiat currency to crypto and executing a smart contract, relatively seamlessly and invisibly. So you can get as into that process as you want, but now you can also stay fairly remote from it. But because crypto fluctuates quite a lot relative to fiat it’s sometimes easier to think about the crypto equivalency if you’re buying things in crypto, rather than doing that translation backwards.
ARENI
To summarise, the interest of using NFTs is that I’ve got a contract, which is not interchangeable. And it’s also recorded in the blockchain I suppose.
Behdad Shahsavari
The smart contract is actually a separate thing than the NFT. So, the smart contract is executed. It’s a contract. The NFT is the actual token. This NFT is worth this many fiats and they’re going to be exchanged between this wallet and that wallet. Those wallets have agreed that that exchange is going happen for that value. That is then recorded on the blockchain. That single transaction is safe, immutable and transparently recorded. Anyone who wants to get access to that transaction can see it.
ARENI
But how do we access it? And how does it relate to the metaverse? When I’m on Twitter or Facebook or Instagram, am I on the metaverse or is it accessed through a platform that I don’t know about?
Behdad Shahsavari
Anytime you’re interacting in the virtual world, you’re in the metaverse and that’s why it’s not necessarily a helpful label. If you’re gaming, you’re in the metaverse. If you’re doing virtual reality or augment it reality, you’re in the metaverse.
NFTs really only exist in the metaverse, but they’re only a small part of the metaverse, the virtual world. As we all know, the lines are blurring between the virtual and the real world. Those transactions and interactions are getting more and more just like real world. And especially for younger generations, they’re a much more seamless part of their life. They don’t necessarily think of the metaverse as fundamentally separate. NFT really only exists in the metaverse and if you buy digital art, of course you can print it out, I guess, but that’s not really the point.
It’s sort of like if you bought a Picasso, and took a picture of it. Yes, you can, but that’s not really why you purchased it. You can just display it digitally in your home if you want. I understand Samsung TVs are now gonna start adding a feature to display your NFT art, if you want, as a wallpaper. I think you should be able to consume things, however the heck you want.
The lines are blurring between the virtual and the real world. Those transactions and interactions are getting more and more just like real world. And especially for younger generations, they’re a much more seamless part of their life. They don’t necessarily think of the metaverse as fundamentally separate.
Behdad Shahsavari, co-founder, Dvin
David Garrett
Twitter just allowed you to connect your digital wallet and use your verified NFT as your profile picture. And Instagram has announced plans to to allow you to attach your digital wallet and display your NFTs in Instagram. It’s all coming pretty soon.
ARENI
The interest in buying digital things and having in the metaverse or also to show it to other people. Before, you would invite people to your house to see your art and your wine cellar, and now you can show it on Twitter and Instagram. But you can also use it for real products and real-life products. Can tell us a bit more about this please?
Behdad Shahsavari
Yes, absolutely. There have been a number of interesting projects historically trying to, for a variety of reasons, attach NFTs to physical objects. It was all about one of the fundamental promises of the blockchain, which is authenticity and traceability. And that didn’t necessarily have much of anything to do with NFTs. I can track through the blockchain exactly where my goods have been, how they’ve been handled. If you want prove authenticity, if you want to prove that goods are organic, for example, or sustainable, that is one of the technological means to do that.
De Beers built a platform called Tracer for diamond authentication; there are issues with fraud and authenticity and the sourcing and origin and legitimacy of the diamond trade. And a lot of luxury manufacturers have done this. A lot of watch players are authenticating their individual units not just with a serial number, but also with an NFT. And there are a few benefits to that.
One is the traceability. It’s immutable and recorded, and it’s a permanent part of the smart contract. Let‘s take the watch example. Every time it’s transacted, we have an exact record of who, where, for how much, when, in what condition. The manufacturer can do a bunch of things to make sure that those transactions happen on the chain. The other interesting thing is that those transactions can then be monetised.
And this is where it becomes interesting for both art and wine. They can get a percentage of the aftermarket value of each of those trades. Whereas historically it would’ve just been a private-to- private transacaction. The typical amount is around 10%. Some people charge less, some people charge more, but in NFT land, the so-called creator premium is about 10%. And the platform premium is about 2.5% which, if you compare it with typical auction markets is much, much more favorable.
This is where it becomes interesting for both art and wine. They can get a percentage of the aftermarket value of each of those trades.
Behdad Shahsavari, co-founder, Dvin
ARENI
For wine, the interest is that every time the bottle is sold on the secondary market, the wine maker has put the bottle on an NFT and takes back part of the value added of that price. If I put price my wine at €100, every time it’s sold on the secondary market with a higher price, I still make a bit of that margin back.
Behdad Shahsavari
In this case, the analogy for the wine merchant would be closer to the 2.5% percent because they’re the enabling platform rather than the creator. But yes, and I think that sounds great to some people and weird to some. If you think about the physical equivalent and you think about a watch, you might think, wait a minute, I paid for that. The watchmaker made their margin the first time. Why should they make more money each time? But if you use the art equivalency it feels different somehow, right? Like it makes perfect sense. Hey, why should the auction houses make 20% every time that an artist’s work is resold and the artist makes nothing or their estate makes nothing.
Somehow when it’s a physical good, we find it harder to make that equivalency sometimes. And I think that’s part of what the metaverse is changing, and the idea that people are valuing experiences more than ownership of things. That combination is helping people get their heads around the fact that it’s the experience that we value and that there should be a value exchange every time.
ARENI
That’s a perfect time, David, to let us know a bit more what you’re doing with wine.
David Garrett
Sure. We‘re launching a membership club, an association called Club DVin. That will be a virtual membership club, similar to some of the other clubs that you’ve seen out there. Part of that the idea is that the wines you purchase through the club will have NFTs attached. And one of the first events that we’re doing is with Robert Parker who is starting to donate his personal collection to to charity.
ARENI
If I want to become a member of your wine club, I have to have a digital wallet, I suppose. So I’ve got to open this and I’ve got to put money in or find cryptocurrency to put in my digital wallet and then I can buy one of Bob’s bottle. How does it work? Once I’ve got this, I’m the owner, not of the bottle, but of the NFT attached to the bottle. How can I exchange it, how can I sell it, and what happens if I want to drink my bottle?
David Garrett
You’ll own the bottle. And you’ll be able to buy it in US dollars or any currency that you want. The NFT serves more as a certificate of authenticity and a chain of custody. We think that with most of the bottles that are sold out of the Parker collection, people will probably take possession. They’ll want to have those bottles in their cellar. But then if they wanted to sell those bottles in the aftermarket, they would sell them along with the NFT. And thus the chain of custody would be attached to the NFT and would be transparent on the blockchain.
ARENI
Will I be able to resell it through my fine wine merchants? Or do I have to go through a particular platform that will help me with the NFTs? How does resale work?
Behdad Shahsavari
Good question. If you want to sell it with the NFT attached, you’re going to have to sell it on some blockchain-enabled platform. We’re not planning to restrict which platform you can use. The whole purpose of doing this is to create transparency and openness.
If the next person who buys it says, Hey, that wasn’t right, it’s traceable. It’s going to come back to you.
ARENI
When I’ve talked to winemakers about this and about attaching NFTs to those bottles, there are different reactions. Some winemakers are really anti this because they see this as a means to facilitate speculation. And some winemakers do see the interest as well because it allows less movement for their bottles. Even if you resell the deeds of ownership, the bottle can stay at one place, right?
Behdad Shahsavari
Correct. And you can actually record that fact as well. If provenance matters to you as a collector, I can show you that it has been stored perfectly the whole way. It’s going to be worth much more to you than a bottle where you have no idea.
To the first question on speculation, I would say that that market exists anyway. The interesting thing is if the winemaker set up their own smart contracts, they can incentivize whatever behavior they want. You can set up that smart contract to say: If you resell it and you want this smart contract and authenticity to go with it, the premium is going to be higher. You can set it up with incentives, such that if you buy more and hold more or consume more, you’ll get a bigger allocation as a consumer. Whatever the winemaker’s goal is, they will have much greater ability to influence it by tweaking those smart contracts.
The interesting thing is if the winemaker set up their own smart contracts, they can incentivize whatever behavior they want. […] Whatever the winemaker’s goal is, they will have much greater ability to influence it by tweaking those smart contracts.
Behdad Shahsavari, co-founder, Dvin
ARENI
A bit like your mortgage rate, right?
Behdad Shahsavari
And I can throw in the furniture as well with that. You can do whatever you want. They can say, if you keep buying and consuming bottles, you can attend winemaker dinners with me. You earn the right to visit and do barrel tastings.
The beauty is that the winemakers will now have all of that transparency and data. At the moment, they’re guessing as to who’s speculating and investing. They don’t know whether it’s someone in the distribution chain or it’s just the aftermarket consumers thinking that they’re going to flip it. In many cases, it’s merchants or intermediaries holding the highest value wines and selling them at auction. Now the winemakers will have the transparency as to where it’s being held and why.
We’re intending to provide the service as the platform itself. We’re building the platform for the producers, including reserving a big chunk of the equity collectively for the producers, because we believe that it’s only with aligned incentives that this works. We don’t want to be another middleman. We want to create the platform that the producers would’ve created, if they had the time and resources to think about it this way. We can help them set up a collective. We can work with importers. We’re also going to provide the service ourselves as the club.
ARENI
When we talk about exporting and selling fine wine all around the world, the first big word that comes to mind is compliance. How is the tax going to work if the bottle doesn’t move?
Behdad Shahsavari
Generally speaking, regulations around NFTs are emerging and have stayed pretty loose and vague. In most jurisdictions, NFTs are treated as capital. The digital asset is treated as property/capital, rather than currency, and subject to the usual rules. What isn’t as established is if the only value of that NFT is associated with a physical object.
For the physical wine itself, that model has already been well established. Generally speaking, for investment purposes, most people prefer a bond. We’ll give consumers the freedom of choice, but t we think that it’s based on the precedence that we’ve seen; essentially the value is not in the NFT. The NFT is acting as a part of that smart contract. There will be nothing incremental for the NFT.
ARENI
If I understand correctly, in the wine club, the NFTs and the tokens are not going to be only attached to the bottle, but also to the experience. Can you tell me a bit more?
David Garrett
Each of these these NFTs that we’re attaching to the bottle will have a couple of different functions. The important is to serve as that certificate of authenticity, chain of custody, so on and so forth. On top of that, once you open the bottle, we’ve developed a piece of tech that we’re calling internally the digital cork, that allows you to mint up to 12 tasting tokens, which you can distribute to the people that you’re tasting the wine with. They can have them in their wallet as proof of experience.
We’re still working on some of the design aspects to it, but imagine it’s like your tasting journal that you can keep in the metaverse. It’ll give you an opportunity to see which bottles you’ve tasted, to keep track of the experiences that you’ve had. On the producer side, not only do we get the transparency of when the bottle is opened, but they can also see when the bottles are being consumed.
Once you open the bottle, we’ve developed a piece of tech that we’re calling internally the digital cork, that allows you to mint up to 12 tasting tokens, which you can distribute to the people that you’re tasting the wine with. They can have them in their wallet as proof of experience.
David Garrett, Co-founder, DVin
ARENI
Is it something that I give and people then display, like they would on Instagram?
David Garrett
We think tokens will be used a lot like that. I think that there’s certainly the possibility of a financial transaction, but we may actually limit the amount of transferability for the tasting tokens. We don’t really see those as a financial instrument.
You create a QR code, your friend looks at the QR code, and all of a sudden they’ve got a tasting token in their wallet. Very seamless.
Behdad Shahsavari
There‘s also value in that data, not just for the winemakers, but for the wine community as a whole. If I know all about what Pauline drinks and likes and enjoys, that helps me understand a lot more what I’m going to ask Pauline about.
We’re really trying to get consumers and producers to imagine three to five years ahead when they have several hundred tasting tokens. And to see that whole journey in a very interesting way.
ARENI
To finish, the blockchain is usually associated with the heavy consumption of energy. And, as you know, most fine wine producers are involved quite heavily in sustainability and making sure that they reduce their carbon. Can we reconcile this?
David Garrett
Most of the tokens that we’re building are going sit on a level two chain called Polygon, which is not a proof of work chain. It’s a proof of stake; with proof of stake, there’s significantly less work, so significantly less energy. Most of the crypto community is moving towards a proof of stake system, including Ethereum. We‘re starting with a chain that uses significantly less computing power and significantly less energy than something like Bitcoin.
The crypto world is very conscious of the lack of green credibility and the massive energy challenges associated with crypto. Like the wine community at large, we’re very committed to sustainability and we will be moving to a sustainable chain as soon as there’s one. But in the meantime, the whole community’s moving to much more efficient places generally speaking.
ARENI
How quickly do you think this is going to transform the fine wine world?
Behdad Shahsavari
The more forward-looking players, we’re having very interesting dialogues with a lot of them already. People are aware of it. I do think it’s going to be slow, as technology always is.
The notion of the fine wine world is much, much more democratized and distributed and diverse now than it was five years ago. You look in the US and almost anything that you would consider fine wine is almost all distributed direct to consumer. That‘s already disruptive. Collectors are drinking much more broadly and much more diverse. There are massive numbers of 20- something year olds and 30-something year olds driving huge influence.
They’ll start pushing suppliers to do this stuff.
*Government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
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