The future of wine between Blockchain and NFT

Safe consumption and new market dynamics

Introduction

The wine sector has been experiencing strong growth for years, albeit always at the center of heated debates in various areas, as well as the appreciation and demand for consumer information. In some countries, like ours, it is a symbol of excellence and uniqueness recognized worldwide. Like all beautiful things, wrongdoers are quick to arrive in the hope of taking advantage. In 2021, the wine market in Europe alone recorded losses of 1.4 billion euros, damaging not only consumers but also the image of the entire industry. The only option we have is to trust what we find written on the label or on the producer’s website, but is that enough? In this article, we will see how blockchain helps make information more secure, but not only that. We will see how this technology can lead to new market dynamics thanks to its versatility, trying to dispel the notion that it represents only a control system.

Tradition and Technology: The Level of Digitization in the Wine Sector

An integral part of the history and culture of many countries, including Italy, France, and Georgia, viticulture has contributed to the creation of a unique, globally appreciated and recognized identity value. However, in relatively recent times, markets previously unrelated to the sector have also approached wine production, contributing to the discovery of new wine varieties and innovative technological processes.

It is thanks to these innovations that, over the last thirty years, the product has been able to boast not only one of the most rapid growth rates in history but also a clear legal regulation, making it extremely controlled and capable of ensuring quality, safety, and sustainability.

However, the development of these controls unfortunately stems from numerous past scandals, which continue to appear sporadically in news headlines around the world, although they may be smaller in scale (such as the methanol-contaminated wine in Italy, which in the 1980s caused blindness and, in severe cases, the death of many people). Leaving aside the exceptional nature of some cases, episodes of food fraud are numerous and affect various companies worldwide, from our neighboring French companies to Indonesian ones. For this reason, and to ensure consumer protection, various states have been forced to increase beverage regulation.

The current use of the Internet of Things (IoT), geolocation systems, and highly accurate sensors allows companies to monitor processes along the value chain with scientific data, thus evaluating efficiency and impact. In particular, these data are the same ones consulted by Control Bodies to verify the suitability of products to be placed on the market, as well as the same ones that, especially since consumers have developed a strong awareness of consumption, have been made public and accessible (for example, on product labels or company websites).

Furthermore, the information that the market demands relates to sustainability, corporate ethics, safety, transparency, and more, which is why wine companies bear a great responsibility. Yet, despite numerous certifications related to carbon and water footprints, production ethics, the use of vegan or 100% recycled substances, and so on, and despite the use of the most advanced technologies, food fraud persists, driven by companies that, in a continuous attempt at greenwashing, transmit misleading information about their eco-sustainable practices.

It is easy to see, therefore, how the current control system, burdened by the vast number of active production entities, has numerous gaps, especially due to the impossibility of real-time tracking of a production process free from manipulations. Among the various obstacles to transparency, the human factor remains perhaps the most decisive, especially given its susceptibility. The only valid intermediaries between producers and consumers are control and certification bodies, but they are burdened by the onerous task of physically verifying all the data of the numerous actors in the wine sector. But even in the event they manage to organize a simultaneous blanket check, one question remains: who controls the controllers?

The Advantages of Blockchain Technology

Thanks to an intrinsic protocol based on a trustless ecosystem, the Blockchain ¹ provides an escape from such insecure and manipulable systems because every user is a certifying party of transactions.

The blockchain network is nothing more than a shared and updated public ledger; therefore, any transaction that occurs on it is visible to every user on the network. This alone helps us understand how the transparency of this technology makes manipulation and dissemination of false information difficult ².

The blockchain eliminates the need to rely on intermediaries, certifying bodies, and paper document repositories, making every process faster, automated, and secure. Furthermore, the data contained in the transaction block, such as timestamping and digital signatures, discourage any fraudulent activity through greater identification of operators’ responsibilities. This new way of processing data shortens the gap between the various actors in the value chain. In the production process, each step in the value chain could be recorded in minutes, allowing consumers to have truthful and immediate information. This communication can occur from both sides, allowing consumers to send information to producers, improving service communication and response times. Furthermore, processing data transmitted with blockchain simplifies logistics, the withdrawal of batches from the market, and timely consumer protection by monitoring the product throughout its entire farm-to-fork lifecycle.

The digital identity of the product can safely tell the story of its journey beyond the company gate by adding, for example, an RFID sensor, NFC, or QR code capable of recording every step along the entire supply chain without the risk of tampering. The investment and coordination that Control Bodies and producers will have to implement could not be more profitable: disintermediation, multifunctionality, transparency, and reliability enable new market development through consumer loyalty, which now more than ever needs these virtues.

NFTs for a New Relationship between Producer and Consumer

However, the blockchain is not only useful in terms of transactions or certified information; thanks to smart contracts, for example, new functionalities have been made possible, usable by both businesses and individuals.

A smart contract, a “smart contract,” is a very simple contract between two parties based on DLT, where a specific input inevitably leads to an output ³.

Thanks to smart contracts, it has been possible to create NFTs, non-fungible tokens, which are digital ownership certificates for a specific asset that are publicly and uniquely assigned to a single individual (and therefore not claimable by other parties).

NFTs allow for a deeper and more diverse relationship with consumers: by playing on the possession of a branded digital asset, companies can create new needs or targeted marketing strategies. Companies themselves can produce NFTs based on their mission, leveraging both the function and scarcity of these assets. This dynamic can give rise to a new form of loyalty between the consumer and the brand, with new clubbing synergies, reward programs, limited products, and services.

Furthermore, in recent years, multiple gamification strategies have been developed, opening the doors to the collection of limited edition bottles, as seen with the most prestigious and well-known companies in the world, which make up the niche market of fine wines. They have used NFTs for futures, which involve an advance payment to reserve a certain quantity of bottles from a future vintage. Thanks to blockchain technology, the collection of these bottles cannot be victim to counting errors, human or otherwise, as only the owner can prove ownership of the asset. At the time of withdrawal, simply showing the NFT is sufficient.

However, the utility of these tokens does not end here: the NFT remains in the possession of the buyer, unless the company decides otherwise, establishing a relationship that goes beyond the moment of purchase. Keeping an asset allows for additional benefits, such as the potential accumulation of loyalty points

 or access to exclusive experiences and services. For example, an American company has created NFTs that give customers the right to vote on the company’s operations. The money collected from the sale of limited assets is used to finance new projects dedicated to improving infrastructure and machinery or to “adjust” the wine of various vintages based on consumer tastes and impressions. These are just two examples of use cases, but the cross-cutting capacity of this technology makes it applicable in a thousand different ways.

This new relationship between producer and consumer, based on transparency and the involvement of loyal customers, has become even more necessary with the arrival of the pandemic, when consumers‘ longstanding mistrust, accumulated over decades, has led to meticulous attention to food safety and food security. Today, even though the fear is no longer the same as in past years, the assessment of environmental impact, safety, and ethics of a company remains under the watchful eye of the market and laws. Communicating directly and transparently is not only a marketing move to increase the user base but an urgent necessity. In this sense, blockchain technology can restore credibility and integrity to the entire sector.

Adaptability of Blockchain to Current Control Systems

As technology development is extremely fast and brings many innovations, various countries struggle to adapt legally. Regulating such a versatile technology without endangering consumers and without hindering the evolution of various applications is not easy. In the meantime, in the midst of a highly active debate, the blockchain is increasingly fueling the interest of banks and governments worldwide, who have recognized its usefulness and are trying to develop it by integrating it into current global management systems.

In this scenario, the agri-food and wine sectors have much to gain in terms of transparency and certification, which is why many public and private projects have been launched to support these industries over the past decade.

In Italy, starting from January 1, 2016, all producers are obliged to register information concerning production, bottling, and market exit on the telematic register of the National Agricultural Information System (SIAN). This can be considered a first approach to blockchain, as it explicitly talks about the dematerialization of registers.

Since 2020, the European Commission and the Italian Ministry of Agriculture are promoting the use of this technology for the certification of traceability of agri-food products, especially those with PDO and PGI labels. The data collected can be published on public blockchains, or alternatively, it can be recorded on DLT (Distributed Ledger Technologies), which are private blockchains where only registered actors in the supply chain can send and modify information recorded along the supply chain (the ledger remains distributed and decentralized, but authorized users are defined and limited in number).

Of course, these private blockchains can be subject to inspections by certifying bodies authorized by the Central Inspectorate for the Repression of Fraud (ICQRF), either physically on a periodic basis or through advance insertion of Control Bodies into the DLT (a method that saves time and resources for both parties). The documentation required annually by Control Bodies from producers involves quantitative and qualitative records, starting from the vine potential and analyzing data related to cellar accounting, winemaking and agronomic practices, labeling, and especially state marks. Controls are done annually on a sample basis ⁴.

The integration of blockchain into the recognized production chain by certifying bodies would allow real-time recording of production data without the possibility of manipulation, making them accessible at any time for everyone. Instead of collecting fragmented information, a smooth, tracked, and verified path would be built, from grapes to the exit of the bottle from the company’s gate, and then to monitoring movements in the market. With proper supervision, it would also be possible to prevent the sale of these products to unauthorized countries or entities, protecting against illegal sales.

Currently, the Common Agricultural Policy (CAP) encourages and urges EU member states to use blockchain to address issues related to production, communication, and trade. The Ministry of Enterprises and “Made in Italy” has indicated it as crucial for the protection of products and consumers from counterfeiting abroad (which gives rise to the phenomenon of “Italian sounding”). This is why the decision has been made to officially include it in the certification and control protocols for the coming years. Counterfeiting, of course, does not only affect Italian products but also a few other countries with globally recognized enogastronomic specialties. In other countries, such as France, the integration of blockchain may be more complex, as the current procedure involves many self-checks carried out by internal auditors, with less frequent and sample checks.

¹ The blockchain – literally, ‘chain of blocks’ – is a ledger containing current and past transactions, each of which is processed by the entire network of users before it can be validated. It is a technology, therefore, that gains power in a cumulative manner, benefiting from the computational power that each connected user offers with their device.

² Although it may be thought that it does not guarantee privacy, in reality, it does allow it to every user of the network and every transaction, as every piece of information that passes through it is encrypted with a special hashing algorithm, called SHA-256, which makes it impossible to decipher in letters the content or the individual’s own name. To take advantage of this technology, each user must first register and be authenticated, so that he or she is assigned a verified digital profile. Once registration is complete, the individual is then given a unique private key, with which he or she will sign all the transactions he or she wishes to perform.

³ That’s right, inevitably: the blockchain cannot be circumvented or tampered with, and once activated, the contract cannot be stopped, and a given input will always be followed by a given output. It is therefore crucial for the parties to establish the terms of the smart contract together, precisely, as the absolute impartiality it enjoys will not allow for unlawful claims.

⁴ This procedure makes it difficult to guarantee that each individual producer has really complied with the production specifications and rules in force. In any case, if a wine falls outside the parameters set before declaring fraud, it will be up to the body in question to decide whether to downgrade or reclassify the product.