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.
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.
- 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.
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.