Investment proposal for the treasury - $2M - NFTs of real world fine wine

General Discussion
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Background

  1. As Wonderland’s treasury continues to grow, there is a need to deploy the assets to generate yield. The fact that Wonderland is the largest DAO creates both opportunities and challenges - one of those is to properly diversify the investment portfolio - reducing the correlation of the different assets in the portfolio improves the risk-adjusted returns.

  2. NFTs are one of the most important use cases of crypto, alongside DeFi. While Frog Nation has excelled at building a phenomenal DeFi ecosystem, NFT remains a significant area of opportunity to Frog Nation. This was recently highlighted by Dani: “NFTs collecting/flipping is very powerful because is the base dynamic of trading / commerce” (https://twitter.com/danielesesta/status/1477419310616301578).

As Dani mentions in his recent discussions, there are certain areas that NFTs are still underdeveloped, and there are material opportunities to create and claim value. Among those, a critical aspect is the addition of leverage, and fractionalization. Leverage has been difficult to implement, because of the difficulty to underwrite the underlying value of “a JPEG”. This is a specific area that Frog Nation has knowledge and capabilities, through Abracadabra. Wines have a clear and non-volatile market price, with material downside protection, leverage is ideal for this asset class.

  1. Fine wine is part of a larger asset class of high-end luxury goods. This broad asset class is attractive for different reasons. It benefits from attractive returns that are not correlated with the broader market, and as a real asset act as an inflation hedge. The index Liv Ex 1000, which is the broadest index of the fine wine market, appreciated 16.5% in 2021.

Wine has two distinct characteristics that result in a natural price appreciation dynamics, which makes leverage very compelling, given the natural decline in LTV as V goes up. These two characteristics are the improvement of wine as it ages. Fine wine actually becomes better over time because of the chemical evolution of wine in the bottle. Secondly, wine is a perishable asset. As people consume a wine, supply decreases, the rarity increases, and so does the price.

Lastly, up until now, buying of wine has been done in whole units, most often wine cases. The “minimal” unit of physical wine is and has been a bottle of wine (it is impossible to purchase 1/2 a physical bottle of wine). This has excluded many from investing in the fine wine market, as investment-grade wines often sell at price points of hundreds and thousands of dollars. NFTs open the door to increase demand, prices and returns through fractionalization.

The Opportunity

Wonderland can become a leader in a necessary building block of the NFT space - addition of leverage - through an asset class which is probably one of the most suitable for NFTs and leverage. This can be done in a very capital efficient manner - in which Wonderland builds an NFT portfolio of fine wine, and relatively quickly re-sells it to the market, while having a roylaty mechanism to benefit from any future sale.

This will result in the following benefits: first, Wonderland will be able to generate attractive returns on a small portion of its treasury, while diversifying its asset composition, and adding a real asset which is known to be an inflation hedge. Second, since there is a robust liquid market of fine wine, Wonderland will be able to realize the investment, reclaiming the initial capital invested + return, while continuing to benefit from a royalty to further enhance the treasury without tied capital. Thrid, Wonderland will take first steps in the field of NFTs, in a specific niche which is easy to underwrite given market depth, transactions and public data, and minimizes the downside risk. Fourth, Wonderland will be able to innovate exactly where Frog Nation has competitive advantage in the crypto space - addition of leverage. The knowledge Wonderland will accumulate in this small venture will be scalable as the broader NFT space evolves to add leverage. Sixth, from a marketing perspective, wine aficionados will learn about Wonderland and Frog Nation, and this will expose Wonderland and Frog Nation to a new cohort of wealthy and influential potential investors.

It is suggested that Wonderland dedicates a small portion of its portfolio - $2M - to acquire investment grade wine. This will allow the construction of a balanced portfolio (in the space of fine wine, this for example includes wine from different regions: Bordeaux, Burgundy, Champagne, California etc.). Wines can then be “paired” with an NFT, that will determine the royalties Wonderland will receive when the NFT is sold.

If desired, Abracadabra will be able to develop a complementing borrowing option (suggested at 25%-50% LTV).

About the author of the proposal

I am a Wonderland HODLer. Have never sold TIME, and only increased my position. I am a believer of the Frog Nation universe, and have invested in Abra, and ICE - never sold.

I am also an investment professional, who trades fine wine professionally for investment purposes.

Am happy to expand if necessary and I look forward to hearing insights and reactions.

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My initial response would be no, but I don’t know enough about wine to be able to have an intelligent opinion one way or the other. I guess I’d start with a couple initial questions:

  1. How would the wine be stored? Doesn’t it require special storage for not only protection, but also to ensure it doesn’t spoil (or whatever wine does)?

  2. Who would be responsible for the custody of the bottles purchased for these NFTs? The benefit of NFTs at the moment is that they are trustless because they are a digital asset that’s stored on the blockchain. A physical bottle of wine has a lot of responsibility and care attached to it, especially the higher dollar varieties like you’re talking about here.

  3. How would additional overhead be covered when it comes to creating these NFTs?

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Thanks for the comments and important questions.

Yes, you are absolutely right. Wine requires special storage - temperature and humidity controls to ensure the wine remains its quality and is not damaged. There are many dedicated facilities globally that specialize in fine wine storage. For example, being a wine trader professional who is London based, I have storage facilities in the UK and in Europe.

The wine that I store is fully insured, to make sure that if the wine is damaged, the value of the wine is recovered (for example, if there is electricity outage at the facility, no cooling and the wine is damaged). For full transparency, it does not provide full and absolute coverage in any single event: for example, if I had acquired wine that was counterfeit to begin with, and I had not inspected it properly, the insurance would not apply. Since I inspect every case of wine I acquire (I rejected cases that were faulty when I received them), I have never had a single event that I was unable to sell my wines because of fault.

While I think you are right to ask about custodial risks to investing in fine wine, at the same time - there is no “smart contract” risk, no “rug” risk, no “cyber security” risk, no “seed phrase” risk and many other crypto-related risks. So yes, it has risks that JPEGs do not have, but at the same time it does not have risks that other NFTs / crypto assets do have. Bottom line - in my opinion the custodial risk profile for fine wine properly purchased by a professional is actually lower than the risk of crypto assets. Another point in this respect is that the custodial risk is spread across many cases of a few hundreds / thousands of dollars, so at the portfolio level it’s pretty negligible.

As for the creation of NFTs, I think at this stage it should not be very expensive, as the minting of NFTs is almost “a commodity”. At the end of the day, diversification of a portfolio is generally a plus - especially when it complements so much of what Frog Nation is doing in a scalable way (as described in the initial proposal). And you have to decide whether you should not diversify (or avoid diversification to areas in which you don’t have the expertise), diversify to those areas but have an existing member of the team do it (not being an expert in the new field), or having additional expertise that would enable you to professionally diversify, with some additional overhead. This is the tradeoff in my mind. As for fine wine, I think the benefits as mentioned above (capital efficient returns, while gaining expertise in leverage driven NFTs and exposure to a new broad cohort of potential investors in Frog Nation) significantly outweighs costs that should be relatively low and manageable.

To be clear - I made this suggestion because I think this solution is relevant for several Wonderland / Frog Nation goals, in particularly a smart expansion to the field of leverage driven NFTs. I am happy to be part of the execution, and contribute my knowledge, capabilities and resources - but I’m not doing it for personal gain, and if this is offer is executed by someone else - this is also fine. I’m just putting out there what I think is a good opportunity for Wonderland.

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I appreciate the presentation of this proposal in its structure, clarity, and clear arguments, and want to thank the intiator.

I would agree with the points made about fine wine as an asset type, but do not think that Wonderland is well equipped to undertake this proposition. Pursuing any real world asset would require have the human and physical resources to manage custody and a legal entity that could be the participant in acquisition and transfers of ownership. Even if responsibilities for acquiring and custody of wine were delegated, you still need someone with the right knowledge and skills to assess and oversee the management. Given that Wonderland has a very limited full-time staff, it is questionable how well they could execute such a function and the relative returns do not justify the time that would be required to oversee these assets. I would also wonder how much such a strategy could be scaled.

So I appreciate and respect the thoughtful presentation, but am not convinced that this is a good strategy for the specific situation of Wonderland as currently constructed.

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Thanks for the comments. I think they are fair and to the point.

  1. Yes, I agree with the notion that the purchasing and custody of the wine would have to be delegated. This is a service I specialize in, but I’m not the only one. I am saying that because that immediately shifts the dynamic of the discussion from the idea itself to what I am trying to gain. So I’d rather focus on the idea that the right knowledge exists. From there to move to another critical point you raise which is whether this idea is suitable for Wonderland. And only if there is agreement that this idea is both realistically possible and suitable for Wonderland, discuss who is best positioned to execute.

  2. I think it is becoming pretty clear that Wonderland will need to expand beyond its core expertise and comfort zone. Dani is discussing NFTs and Sifu is presumably building a sports betting platform. It is my assumption that the team is / will grow, and new capabilities and expertise will be recruited. Is the assumption that the same team will do NFTs and sports betting and other new products? No new hires or providers?

  3. NFTs are nascent. Leverage of NFTs is almost non existent. I believe there is tremendous scale for a DeFi operation to understand leverage dynamic, be able to collect data on LTVs, liquidations, provide lending/securitization of pools of NFTs etc. This is a blue ocean.

The returns of fine wine are nice, but while it is the most direct goal, it is also less important. The main goal is a pilot program to understand NFT dynamic with an asset class that just “begs” for leverage to be built in, with material downside protection (due to the stable price appreciation of wine). I am also convinced that as high end consumers of fine wine learn about Frog Nation and the opportunities, Wonderland/Abra/Ice would be able to attract a new cohort of valuable long term investors. I myself got to crypto through wine and NFTs.

Given the limited risks to any allocation of the treasury, and what I think can be a pretty lean operation, in my opinion, the scale will manifest itself as Wonderland becomes part of the lending infrastructure for NFTs either as a technology platform or as a capital provider, or both.

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I would agree with your point that the Wonderland core team will need to grow as the protocol grows. Given the size of the treasury, I do imagine that they could continue to focus primarily on native crypto investments for a considerabe period of time, particularly if you start to think about the segments of crypto that are focused on delivering de-centralized services (e.g., file storage, e-commerce, internet routing, etc.). USD 1 billion is a lot of money in real terms, but still not a big number in the context of markets.

That said, you do have a good point that NFTs which allow people to make fractional investments into real-world assets is an area of huge opportunity. However, the ability to unlock these opportunities is partially tied to the pace of regulatory changes since, to my understanding, there is still not a strong legal framework to ensure that tokenized rights can be legally enforced. A typical approach would be to appoint a new team member to explore a business area, map the opportunities, and make a proposal for how to approach the ones that made sense. That would seem to be the starting point, particularly given the issues around managing custody, ownership transfers, etc. rather than picking a physical asset to jump into. Or perhaps seek to partner with another protocol that is trying to tokenize real-world assets. There are a couple of these already which could offer the opportunity to learn about the NFT space.

Lastly, I would agree with you that NFTs based on real world assets are preferable to trying to guess which digital image NFT is suddenly going to become highly demanded.

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