Paul Howard Articles, Blockchain, Blog, Wine Business 11 Comments

Blockchain

The future of the wine industry will be Blockchain

Disruption. A much-overused business word. Every new product, service and start-up we are assured, is disruptive. It’s the game-changer, the holy grail. Yeah, right. Well, the Blockchain probably is.

A couple of years ago I studied a new technology called the Blockchain, on behalf of the Financial Services Industry. I was hardly alone; 22 of the world’s major banks are collaborating on developing and deploying this technology. The Blockchain is now the financial services equivalent of the Second Coming. Billions of dollars of venture capital have already been invested in Blockchain developments and start-ups. This time they say, disruption is for real.

But what is Blockchain and what’s it got to do with wine?

I’ll get to the wine bit soon. Firstly though, to understand the Blockchain let’s start with Bitcoin. You’ve heard of Bitcoin, the alternative cryptocurrency. While increasingly accepted by commerce, it’s also the currency of the Dark Web, with its nefarious dealings. Despite this, Bitcoin is gradually moving towards mainstream acceptance. Whether Bitcoin is a revolutionary new currency or not is, however, irrelevant here.

Instead, the relevance of Bitcoin is the decentralised ledger technology called Blockchain that supports it. The Blockchain is the future of transactions. Any transactions. The technology is highly sophisticated, but the usage is simple. It will eventually disrupt the distribution chain in every industry, including wine. The consequences could be enormous.

Imagine Blockchain as a kind of torrent download technology that operates in reverse. Have you downloaded music or films using peer-to-peer (P2P) torrents? Legally of course! Then you might know that the download you receive isn’t from one central computer. Instead, the download consists of pieces of separate data sent to you from a decentralised network of computers. Assembly into a complete and usable file is by your software.

Now apply Blockchain to transactions

Currently, if you want to buy or sell anything, then there are several costly and lengthy stages to go through. Firstly, you need to find a trusted counterparty to buy from or sell to; then the trade requires agreement. Now payment happens. Afterwards, the transaction requires recording and reporting, say for accounting and tax.

But here’s the crux;  how do I trust a counterparty I don’t know? Or if I know them, how infallible and trustworthy are they?

Counterparty Risk

This issue is called counterparty risk. Intermediaries act as a reliable point between the buyer and the seller. That’s what Banks essentially are, or should be. In wine distribution, importers, bonded warehouses, merchants, transporters, auction houses, and retailers are all intermediaries. Each is a separate link in what can be a long chain between the winery and the consumer.

Every intermediary maintains a centralised ledger of the transactions they make. Each acts as the guarantor to both parties in the trade, and shows proof as necessary. Of course, the intermediary takes a nice little earner for its troubles. But the audit trail along the chain breaks readily because each transaction along it is not directly joined to the previous one. Using Blockchain changes the distribution chain by joining all deals up.

In the Blockchain, computer networks compete to facilitate and verify any individual transaction for a fee. The winner adds a new block of data to the Blockchain. The system does this according to a set of pre-agreed rules, carried out by members of the network called miners. They use specialist software and enormous computer processing power. The result is a secure decentralised ledger of all transactions. Now linked together unbreakably, there’s no single data owner or failure point.

Every ten minutes the winning miner creates a ‘block’ of all their verified transactions over the network. As each new block of these deals completes, it links to all the previous deal blocks, so extending the Blockchain.

Sophisticated cryptography and security ensure each block is digitally signed. Any attempt at alteration invalidates all previous entries, right back to the very first one.

The brick wall analogy

Think of a brick wall. If you want to change a brick within the wall, you must remove all the brickwork above it first. That makes every entry in the Blockchain extremely tamper-proof and completely auditable. You would need to control the majority of the network computers and have immense computing power to alter it. And such tampering would be obviously visible. Over time, the wall is built higher and higher, making it ever harder to undo.

Increasing trust and reducing fraud

The Blockchain is public and highly transparent because anyone with permission can see information on every transaction. Hence it transforms transaction verification, recording, reconciliation and reporting. And with high speed and security. It eliminates the risks of defaulting counterparties, contract issues, lost paper trails and frauds. You don’t need to use Bitcoin, any currency can be exchanged. Replacing people by Blockchain’s automation will result in massive cost reductions too. The opportunity for streamlining and increased profits in the name of efficiency will drive adoption.

In my opinion, these benefits mean that in future, those intermediaries without Blockchain will cease to exist.

The Blockchain will probably take off first in financial services. It’s where the investment in R&D is happening now and there are no physical goods to track. Banks have realised they can dispense with costly administrative people, enhance security and transact indelibly at incredible speed.

But there’s no reason why the Blockchain would stop there. It will eventually affect every industry, including the wine trade. It just needs two parties that want to exchange goods, money and information.

If you think I’m overstating the case, then start with this report from the UK Government Chief Scientific Adviser. It also has more details for the tech-savvy. Governments are taking this development very seriously.

As with any new technology, there will doubtless be Blockchain applications yet unknown, some with unforeseen consequences. Just like the development of the Internet itself. But for the wine industry adopters, here are some examples of the potential Blockchain benefits.

Blockchain helps wine consumer protection

Some wine benefits are already becoming clear; including provenance, authenticity, fraud reduction and consequently consumer protection.

At the top end

  • In the rarified arena of wine investment, millions of pounds are spent worldwide on hugely expensive investment grade wines. Verifying the origin of the wine, its storage, and the credentials of the owner/seller are fraught with difficulty. Scams are commonplace and occasionally headline news. Even experts can be wrong. The Rudy Kurniawan trial showed that counterfeit wine is massive. Then there are examples of investment companies taking money for wines they don’t have and then conveniently going into liquidation. Storage has an enormous impact on value too. If you can prove that wine storage is top notch, you’ll get a better price. The Blockchain reduces these risks. Caveat Emptor would no longer apply to provenance. Those wines without ID would arouse suspicion and be unsaleable. Fine and Rare wine expert Maureen Downey has created Chai Wine Vault using Everledger Blockchain in the battle against counterfeit wines. This is principally aimed at this luxury investor secondary market in the way that Everledger is being used for diamonds and art. I do hope that this initiative will succeed.

The mass market

  • You may find it hard to care about the activities of relatively few wealthy individuals. However, the real world doesn’t escape lightly either. Once again, it’s about verifying authenticity, but on a massive scale. For example, in the 90’s the sales of Pinot Grigio exceeded the amount grown. So what made up the shortfall? There have been recent scandals involving Brunello too. Sadly, there are plenty of other murky incidents. Fraudsters substitute cheaper inferior wines, cut them with water, (called Jesus Units!) or use food additives. They have even added dangerous chemicals such as Diethylene Glycol and Methanol which killed people. The latest alleged fraud involves the huge French wine bottler, Raphaël Michel. Carrefour has cancelled their supply contracts. It is alleged that part of this fraud included passing off as much as 300,000 hectolitres (over 3m cases) of wine classified as cheap Vin de France as much more expensive Côtes du Rhône and Châteauneuf du Pape.  To avoid this, growers could attach an independent DNA fingerprint, smart sensor data or chemical analysis to the initial Blockchain transaction. That would remain with the wine and be monitored throughout its life. In other words, verification of wine quality, safety and origins are possible from grape to glass. One might imagine that wineries, their appellations and the Fraud Squad would welcome this with open arms. Organic certification? Easy.

It applies to food too. Adulteration has been commonplace with Extra-Virgin Olive Oil, and you can read about that here.

Blockchain benefits Companies and Governments too

On their own, these examples of using Blockchain as the ultimate bullshit detector might not be enough to justify adoption. Fraudsters are always adept at finding new scams as well. So here’s two more benefits.

  • “The business of business is business”. Companies will want to strip out costs, increasing competitiveness and their profit margins. Blockchain automates costly back office administration, so those workers become redundant. There will be opportunities, especially for large companies, to simplify and scale up by cutting out or acquiring others. They will concentrate on adding value by undercutting prices, enhancing customer service or finding new wines to sell. In ten years time, the intermediary landscape may look entirely different.
  • Ensuring tax and duty payments are correct and timely. Governments show a keen interest in reducing evasion or fraud. After all, this revenue is their lifeblood. In turn, this could lead to a whole new raft of Blockchain-led regulation.

Summing up

For me, the Blockchain is both an exciting and worrying development. But with every new technology; the question isn’t whether the technology is “right or wrong”. The real issues are, “what is the application of the technology?” And, “what are its consequences?”.

Regardless, the Blockchain will be coming for the wine industry and will change it radically.

This think-piece originates from my Blockchain research undertaken for the Financial Services Industry in 2015. I’ve translated it to the wine industry – the principles are the same.

If you are interested in the business of wine, then see my piece on the Cork industry.

Update 21 July 2017: This article is now Number 1 on Google Search for Blockchain and Wine. This is the Zeitgeist.

Share this Post

Comments 11

    1. Post
      Author
  1. Hi Paul. Excellent piece, making a complex idea easy to understand. The blockchain will undoubtedly be a transformative technology across many sectors, from finance and personal data to retail and, as you make in the case for wine, especially where provenance is important. Diamonds, immediately comes to mind; antiques and other areas where CITES regulations exist; even the pet trade. Certainly food for thought. Thanks.

    1. Post
      Author

      Thanks Andy for your encouragement! How Blockchain will transform the wine industry is a particular interest of mine. Please look out for further Blockchain and Wine articles, coming soon…

  2. Hi Paul, interesting piece. You may find this rounds out some of the developments taking place in the physical (as opposed to financial) world. https://www.kynetix.com/news-and-insights/news/blockchain-for-diamond-trading/
    Only other observation may be a bit technical: Bitcoin relies on ‘Proof of Work’ (all those nodes, validations, networks etc. very energy expensive and not very CSR). Now the technology is moving much more towards ‘Proof of Stake’ where only the trusted parties (consortia) need to validate and maintain the ‘blockchain’ (or Distributed Ledger).

    1. Post
      Author

      Thanks, Scott. Thanks for pointing out the difference between Proof of Work and Proof of Stake. Having looked these up, it sounds like PoS is the future of Blockchains.

  3. Dear Paul,
    thanks for the article, as you said it is top on the Google search for Blockchain and wine
    i am very interested in the wine supply chain (actually it is my full time business being an importer of Italian wines in China)
    in the last weeks i have been reading on Bitcoin and then, like many, i start reading on Blockchain, Smart Contracts, Dapps and so on …
    obviously i start thinking how i could relate this new technology to my current business …
    your article is very nice and right on the point, but as a professional operator in this supply chain i have some concerns …
    the idea is perfect for tracking and guarantee authenticity …
    but i live in China were frauds are common … how to stop some professional to copy some legitimate smart label? i can imagine a serious winery embracing the technology and provide a label with a QR to be scanned and all the nice info will ready, which exact parcel of land, which grapes, which day was harvested … blablabla … maybe we can add the importer … the importer being a interested stakeholder in the process will probably check in the lot of wine on arrival and add the next block to the blockchain … but the consumer will it scan the QR and someone notife the distributed network and ledger that he has bought and opened that bottle of wine and therefore the unique ID associated with that bottle is expired, used and non re-usable from scammers who may simply copy QR on the wine store and print them out and re=stick on dirty red water sold as expensive wine …
    in order to make sure the final consumer will use and unique ID code associate with that bottle and so notify the blockchain of the transaction i think we should foresee the bigger picture, not only wine romantic info, but every step the wine must be paid using the QR code and the ledger will be updated at every single step … if someone in the supply chain doesnt update the blockchain we lose part of the advantages i think …

    (sorry, english is my second language and i hope i was able to share my idea_

    1. Post
      Author

      Hi Vito,
      thanks for posting this and the concerns you raise are correct. Firstly you need to establish the origins at the winery and you need all participants in the distribution chain to be willing to maintain the blockchain through all transactions to the end consumer. Hence the smart contract must stipulate that the wine is only transactable on the blockchain. Any break in the chain for me negates the purpose. As far as labels, Rfid and QR are concerned, I think these are too easy to forge or remove. You’ll need the internet of things (IoT) to come up with something like a “smart cork”, the removal of which alerts tampering as a blockchain transaction and destroys the smart cork so it cannot be reused – which also suggests that bottles will be more easily protected than bulk wines. It’s also why it’s up to the big distributors/retailers to facilitate the technology as much as the winery. I see many small pilot schemes first, perhaps with high-value small production on shorter distribution chains, to prove the system and iron out the inevitable problems.

      1. Dear Paul,

        thanks for taking the time to reply

        as i have said i am a professional wine person (and a sommelier), and i am reading blockchain just for my personal interest (which is quiet high) … as many other the blockchain idea made me excited and i started to think if and how it could benefits my daily business …

        “smart label” (QR, atc.) in my opinion is good only for tracking some information from the producer itself (vineyard, blend, vinification, etc.), but can not be implemented till the very end … can not ask an end consumer to scan a bottle QR while is opening it at a friend dinners in order to add the last block in the chain … and so the QR could be re-used

        “IoT” (smart cork) instead is a much better idea, the moment the cork is pulled out a new and last transaction should be recorded and the all supply chain should be safer …

        forgive me but i would like to arise some other concerns:
        – wine business is very competitive and wineries are trying hard to make better wines and cut cost to keep the competitive advantages … a more expensive “smart cork” will be easily and happily introduced for the average bottle of wine?
        – steps in between the supply chain: would be useful to know the wine importer and after the distributor before that bottle reach the restaurant table or shop shelf? if so how to easily foresee such operation? i am an importer and i would be happy to provide my customer information that i am a legit part of the supply chain, that i buy directly from the producer … but once i receive the shipment how to update the network and add my block to the chain? do i need to scan 10.000 bottles each shipment?

        thanks for your attention

        Vito

        1. Post
          Author

          Hi Vito, these are great questions, especially as we begin to move from an idea into a real implementation.

          Firstly, costs. Yes initially such technology will cost – development, unit price etc. But the history of technology says costs fall rapidly as take up increases. Look at RFID tags, these are now as cheap as 5-7 cents each! But also, what cost savings could there be in the supply chain? we can see that inventory management could be more accurate, reducing errors, out-of stocks and audit. Also possible that more sales through end user consumer interest in using an app to see the information. I think the question you pose is really going to be about who pays the cost? is it the winemaker, the distributor, the retailer or the consumer? or is it a joint venture? Resolving this will drive adoption. On your point about scanning. Say you buy 10,000 bottles of a a blockchain wine. That will be by smart contract. The transaction will be recorded with all the details automatically and there will be nothing for you to do in terms of recording…its all in the blockchain ledger. Hope that helps. As you can see, there are many practicalities to overcome and various “actors” in the chain have to decide and agree…but that’s not far away once the benefits start to become better known. P

Leave a Reply

Your email address will not be published. Required fields are marked *