The Future of Wine Provenance Is Bitcoin

Digital Provenance: How Wine Bottles Will Be Tracked Using Bitcoin

Introduction

Bitcoin is going to revolutionize the way that wine provenance is understood in the digital age.  Imagine a world in which you hold ownership of both a physical bottle of wine and a unique digital record that verifies exactly who owned the bottle of wine before you – traceable all the way back to the original producer.  Bitcoin has created a platform that enables digital asset transfers across the internet.  The wine industry is now presented with the opportunity to leverage an emerging technology to make digital provenance a reality.  By associating each physical asset (a wine bottle) with a digital asset (a minuscule fraction of a bitcoin), one can create a traceable, pseudo-anonymous, decentralized, permanent historical archive of wine transactions.

A Wine Problem

The fine wine industry has a problem.  There is a lot of forged wine in circulation and there is a lot of wine that is not properly cared for as it travels the world.  The answer to these problems is to verify the provenance of the wine.  The hard thing about verifying provenance is that there is no central database or standardized industry practices that one can leverage.  Each wine must be evaluated by an expert for signs of authenticity, and each person selling wine is evaluated on their clout within the wine industry.  Inspecting wine is an expensive and time-consuming process.  Relying on someone’s clout is a risky way of verifying the wine as it creates fertile ground for con men.

What everyone involved wants is a way to verify provenance from the winery to the current owner quickly, independently and with confidence.  Knowing the wine’s provenance will dramatically change the value of that bottle, not just for the purpose of avoiding forged wine, but because some caretakers of the wine are better than others.

A bit more on the problem with tracking provenance

The goal of provenance is to confirm that you are receiving a wine that has passed from reputable source to reputable source thorough its life.  It’s considered the job of the auction house to verify the provenance as best they can, at which point they become the primary public link in the provenance chain.  However, auction houses keep their sources hidden, so you end up purchasing the wine based on their word alone.  Provenance today can often only be traced back to the most recent sale.  It is a trail of wines bought and sold through various auction houses, a trail of purchase receipts that make little or no reference to the exact individual bottles sold or who actually took care of the wine in-between the sales.

The problem with current anti-fraud solutions

Producers have developed counter forgery techniques that rival the techniques used by the US treasury to protect the dollar.  The main issue with making forged wines is not the act itself, it’s the fact that you can make many forgeries.  One real wine can be studied and replicated into many hundreds of forgeries that then can be sold slowly through auction houses and markets around the world.  In this case, the value proposition for the forger is very high.  If you can buy a $500 bottle so you can study and sell it as a case, then you make back $6,000.  The more forgeries you make, the more you can recoup your expenses.  In short, if you are a skilled forger, you can make a business out of it.

Defending against forged wine is an arms race as the technology once thought to only be available to industry becomes more accessible to everyone.  The more forgery prevention tricks in place on the bottle (chips, holograms, special inks) the fewer poor quality forgeries will be created, but good quality forgeries will still be created.  A well made forgery will be questioned less by lay people and so they will be more easily blend their way into the market.

Bitcoin and Wine

Bitcoin To The Rescue

Separating the technology from the currency

Bitcoin initially gained popularity due to its use as a digital currency.  However, its underlying technological breakthrough is much bigger than that. It’s the first ever solution, digital or physical, that allows you to securely, and with traceability, transfer assets to another person without involving a third-party.  What that means is that no central company that has to maintain a database of all bottles that were ever produced.   All Bitcoin transactions are recorded in a distributed public ledger that will never go out of business. If you have the digital bitcoin asset in your possession, it’s simply not possible for someone else to claim that they have that same digital asset.

Applying a bitcoin to the bottle

Since Bitcoin is really just a digital asset tracker, it is in essence a digital provenance tracker.  The trick is to associate a physical object (a wine bottle), with the virtual asset (a bitcoin).  To make this work for provenance, as a collector receives a bottle of wine, they must also receive its corresponding bitcoin.  Having both the bottle and the bitcoin ensures that not only do they own the bottle, they also own the only existing digital record of the bottle.

The science behind creating the bitcoin is complicated but recent tools make the end-user experience simple and straight forward.  Starting from the producer, a bottle is assigned a digital asset (a bitcoin) when it is created.  Maybe the bitcoin’s digital ID number is branded on the cork, etched in the glass or simply printed on the label.  In any case the first Bitcoin transaction adds a record on the Bitcoin ledger that the winery created a distinct bottle.

What happens next is also straight forward.  When the bottle is sold, or given away, the winery as part of that transaction will also give the bitcoin to the new owner.  Ideally this will be done as the final step when the wine is physically transferred to the new owner.  It should be noted here that there is no way to void a transaction on the Bitcoin system, so the transfer of the bitcoin really should be the final step that seals the deal.  As the wine changes hands again and again, the bitcoin is passed along, keeping a history of that wine on the internet in a way that can not be tampered with.

Using the public ledger as provenance

So, let’s fast forward to a world in which there is high adoption of this practice.  How do you use this technology to show provenance?  When the winery creates the first transaction on the public ledger and mints the bitcoin, it does so with a public signature.  The public signature is just that, public, just like an email address.  But also like an email address, the public may not know exactly who or what winery created the public signature.  Once the winery publicly discloses their public signature anyone will be able to look at the public ledger for all of their transactions.

When researching the various hops of ownership a bitcoin makes, you will be looking for a public signature for each transaction.  Wholesalers, retailer and other industry entities would also leave their public signature on each Bitcoin transaction.  The collector that ultimately receives the wine from the retailer will use their public key to receive the token.  It should be noted here that the private collector can choose to remain anonymous by not announcing publicly that they own the public key used to receive the wine.  As you audit a wine’s provenance you will be looking at a series of known and unknown public signatures.  The more public signatures you recognize as belonging to sources you trust, the more value you can place on the wine.  If you notice that damaged wines seem to all come through a common public signature at some point, you can start to identify that signature as a risky source, even if that source remains anonymous.

What Bitcoin Doesn’t Solve

This won’t stop all forgeries

Although we believe that this technology will greatly aid in fraud reduction, it will not stop all fraud.  Having a digital provenance will greatly discourage the creation of multiple copies of the same wine.  The situation that will still exist is that of drinking the contents of a bottle and then refilling and selling.  However, for this type of fraud to occur you will need to have the money to buy the wines and the bitcoin token in the first place.  You will then need to be willing to transfer the bottle to a new collector using your public signature.  In an environment where buyers are asking for the bitcoin to be transferred along with the sale, fraud will become a 1 to 1 relationship, verses the 1 to many fraud opportunity that exists today.  This is a significant deterrent to the current fraud business model of producing as many forgeries as possible.

Public provenance is not perfect provenance

Using the bitcoin public ledger to track provenance will still allow for anonymity.  In fact, a collector could create a new bitcoin public key for each transaction they enter into.  The only thing that will deter this is market incentives.  If having a transaction in the provenance of the wine through an unknown entity decreases your ability to get the highest market value for the wine, you will be incentivized to have the seller use a known and respected public signature.  In an industry where the super rich play, being anonymous is part of the game.  It will be interesting to see how a public ledger like this would play out as the wine moves through the secondary market.  What is impossible to forge is the origin of the wine.  As long as the winery uses a public key that everyone can recognize, you can still be assured that the bitcoin came from that source.

Summary

What does all this mean for the wine industry?

What this means for wine is an opportunity to create a system for tracking provenance in the digital world that will greatly reduce fraud and increase the value of transacting with reputable sources.  BitCoin is an open protocol that any producer, reseller, auction house, collector or appraiser could use even if the rest of the industry does not.  Because of the unique solution that bitcoin brings to the internet, it has the promise of being a standard that exists for decades to come.  This means provenance tracking that will not need any industry alliance or central database support could exist for generations.

Use-case: Wine appraisal

You bring 2 bottles of 2000 Mouton-Rothschild to an appraiser, each with their own distinct bitcoin number printed on them.  The appraiser uses software to look up the bitcoin numbers on the public ledger and can clearly see that both coins originated at the winery.  The appraiser will also see that the most recent transaction used your public signature, thus you are the legitimate owner of the bitcoin.  The appraiser would then review the history, see that before arriving in your possession, one bottle first went to a well-known collector and the other first went to an unknown source.  The unknown in this case is the son of the collector and he is notorious for being disrespectful of wine collecting best habits.  The appraiser gives you a full market value quote for the bottle that came directly from the known collector and slightly less value for the bottle that went through the son.  You decide to list the wine with the appraiser and once they sell, you pass your bitcoin to the auction house, who passes it along to the new owner.

Use-case: Authentication

You bring 2 bottles of 2000 Mouton-Rothschild to an appraiser.  They do not have a bitcoin number on them.  The appraiser examines the bottle, inquires about your acquisition of the wine and you knowledge of provenance.  Upon examination, the appraiser determines the wine is very likely real and undamaged.  As part of the appraisal service, a bitcoin is created by the appraiser and stamped on the wine label.  You then go to an auction house to get quotes.  They note the appraisal bitcoin on the bottle and give you full market value at auction.

Resources

About Bitcoin

http://pando.com/2014/09/27/the-bit-and-the-coin-the-two-huge-opportunities-hidden-inside-bitcoin/
http://bitcoin.stackexchange.com/questions/18866/how-can-i-track-assets-in-bitcoin
http://bitcoinbusiness.co/2014/05/13/three-powerful-characteristics-of-bitcoin-asset-backed-digital-currencies/
http://en.wikipedia.org/wiki/Bitcoin
http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/?_php=true&_type=blogs&_r=0
http://fortune.com/2014/01/21/bitcoin-is-not-just-digital-currency-its-napster-for-finance/
http://www.bloomberg.com/news/2014-09-30/coinbase-leads-move-to-bring-bitcoin-to-masses.html

About provenance

http://www.sfweekly.com/sanfrancisco/the-wine-detective-maureen-downey-reveals-forged-bottles/Content?oid=2186203
http://www.wine-searcher.com/m/2012/09/the-art-of-delaying-gratification

About Vinfolio

Vinfolio has been developing software and providing services to the collectible wine community for 10+ years.  Vinfolio sells and buys collectible fine wine, operates the only truly full-service wine storage facility in the United States and provides the free, online, VinCellar cellar management platform.

Authors & Special thanks

This post was authored by Nathan Stankowski, Product Director, and Peter Krimmel, CTO.  Thanks to the following for input and review: Chris Caughman, Simon Liu (http://coinspark.org/), Patrick Nagurny (https://bitpay.com/),  Sari Gelzer, Harley Hoffman, Chad Seeger

Addendum

We received guidance from Coinspark as we explored this idea.  Here is a statement they provided that further explores the possibilities with Bitcoin and the wine industry.

“The bitcoin network is now emerging as a foundation layer for
higher-level services and applications, acting as both a means of
communication and store of record. Bitcoin may become as important to
the world of commerce as TCP/IP is to the world-wide web.

There are currently a number of protocols under development looking to
leverage the Bitcoin block chain. Over the course of time, some will be
more successful than others, but any one of them could be utilized by
the wine industry to help reduce fraud and foster innovation in the
collector market.

We already know it’s feasible to create a digital token from a miniscule
amount of bitcoin, and use that token to keep track of a single bottle
of wine. As the bottle of wine is bought and sold by collectors, the
Bitcoin block chain records and preserves the chain of custody in
perpetuity.

With the CoinSpark protocol, it’s possible today for a winery to create
and issue a digital asset to represent a single bottle, a case, or
perhaps even an entire harvest, with collectors trading the wine across
the Bitcoin network. Since the network is essentially public,
collectors could benefit from improved price discovery.

If a winery were to specify in an asset contract that collectors could
take physical delivery far into the future, the winery could begin to
function like a bank. There could be a vibrant market trading digital
wine contracts, backed by wine reserves which are held securely by the
winery and rarely redeemed until the wine is ready for prime consumption.

CoinSpark also allows fractional ownership of assets. So a winery could
even permit collectors and investors to own a portion of a barrel,
perhaps by the gallon or even by the millilitre, and again trade that
wine freely across the Bitcoin network.

We’re only just beginning to imagine the possible real-world
applications of the Bitcoin block chain, yet we can already see tangible
benefits for the wine industry, such as reducing fraud and increasing
liquidity of collectibles.”