Tracking Bourbon on the Blockchain

Greg Solt

University of the Cumberlands

Introduction

This research paper aims to combine new blockchain technology with the ability to track very expensive wine or bourbon. The alcohol industry has developed two large and lucrative markets in the last few years. The increase in bourbon sales alone has skyrocketed to unprecedented amounts. Some bourbon and wine bottles sell for thousands of dollars on the secondary market. Since this market has become so large, there has become a larger counterfeit market for both bourbon and wine. The counterfeit market is robbing millions and millions of dollars from suppliers and consumers every year. This paper will explain the use of blockchain technology and how it can help to track these bottles.

Other technologies for this project include Internet of Things (IoT) sensors and mobile technologies including 5G and 4G cellular wireless. Radiofrequency identification (RFID) will play a big part in the marking and identification of the bottles. The Ethereum blockchain and its smart contracts capability greatly bring accountability and visibility into these supply chains. Hopefully, this paper will help provide insight into the blockchain's role.

Rare Bourbon and Wine Prices

If you have not seen the Netflix special, Heist 2021, it describes the theft and illegal distribution ring of rare bourbon from Buffalo Trace Distillery. This Netflix documentary highlighted the illicit activity of stealing and selling stolen bourbon on the black market by individuals working at the Buffalo Trace Distillery in Frankfort, Kentucky.

Buffalo Trace produces some of the industry's most sought bourbon brands, such as Blantons, EH Taylor, and their name’s sake, Buffalo Trace. Some of the rarest and most expensive bottles on the secondary market from Buffalo Trace are the different vintages of Pappy Van Winkle, which include 15, 20, and 23-year-old bottles. The 23-year-old bottle has been known to fetch as much as $6,000 to $15,000 per bottle on the secondary market.

Similarly, in the rare wine bottle market, a 1945 Romanée-Conti bottle of Burgundy was sold for over $550,000 at an auction. A 1992 Screaming Eagle Cabernet Sauvignon bottle has sold for over $500,000 to single buyers.

These bottles of wine draw such large prices due to their scarcity; there may be only a thousand bottles a year produced and it’s impossible to find them outside the region they were made.

Another reason these bottles are much sought after is because of their perfection and balance in taste. These batches of wine are award-winning and only improve in taste over time. Rare wine and limited bourbon bottles have continued to appreciate and are now considered investments to be bought and traded for.

The Bourbon Distillation & Distribution Process

Distilleries normally release anywhere from four to five special release bottles a year, which are extremely hard to obtain unless you’re at the distillery at the time of release. Several distributors will get these bottles to deliver to retailers in different regions of the country. These special-release bottles then get classified as allocated or unallocated depending on the regulatory environment of the distribution of alcohol in that state. States that are regulated are considered control states. These controlled states include Iowa, Maine, Michigan, Montana, Ohio, and many more.

Since these bottles are rare and hard to get in any state, they become very valuable, especially in the controlled states, and get sold for a large amount of money on the secondary market.

As mentioned earlier, these bottles become very valuable and invite the ability to try and deceive consumers. Counterfeit and modified bottles are a reality in this marketplace, and the losses to deceived consumers can add up to millions of dollars per year.

Since these rare bottles are hard to obtain, there could be an example of this process of how a non-fungible token (NFT) on the Ethereum blockchain could be minted as a batch of bourbon has been created.

NFTs will be discussed further in this report. For this example, we will use the 53-gallon standard for the bourbon barrel sizing, which normally yields about 200 to 300 750 ml bottles depending on how much evaporates out of the barrel, known as the "angels share."

These 200 to 300 bottles would be very sought after since this batch of bourbon may have certain characteristics. These could be that they’re distilled by a renowned distiller, such as Heaven Hill, Woodford Reserve, Wild Turkey, and many more. This batch could have a specialized recipe. It could be a collaboration with other distilleries. Maybe this batch’s barrels are stored in a certain location in the rickhouse (warehouse) to give it a different tasting profile.

Why Does The Placement Of The Barrel Bourbon In The Rickhouse Give A Batch Of Bourbon Different Characteristics?

The temperature changes in the rickhouse will cause the oak barrel to swell and contract to allow more distillate inside to get absorbed into the barrel and take on more characteristics over time.

(Figure 1: Bourbon Barrels in Rickhouse)

Special releases of bourbon can be created from these barrel placements in the rickhouse. Some of these releases include bottles of Single Barrel, Full Proof, certain Aged Variants such as 10 or 15 years, and Bottle in Bond. There can be a special release that is aged in a specific secondary barrel, such as a port wine bottle, as High Bank out of Columbus, Ohio, has done.

Barrels are marked at the distilleries. These are marked or stamped on the top of the barrel, called the whiskey barrel head. The stamp is a way for the distiller to track what's in the barrel when it is barreled and where it is stored. This information could be transposed onto a label with a QR code, but the changes in temperature and humidity in the rickhouse could cause the label to fall off. There could be the invention of a smart barrel tag that is affixed somehow to the barrel, which would have the same information as above, but it would also provide the exact placement in the rickhouse. This is explained later in the infrastructure part of this report.

The Bourbon Supply Chain

Several items make up the bourbon supply chain, including the oak wood barrels that are required for storing the bourbon batches. To understand the long history of bourbon and the strict requirements of what whiskey can be called true bourbon. One of those requirements is that it must be stored in a new oak barrel, preferably from the state of Kentucky. Once the barrels are assembled, charred, and delivered for use. Distilleries such as Heaven Hill go even a step further and put an RFID tag on them to be able to track them through their warehouse or rickhouse. Utilizing RFID technology to track barrels is one of the main parts of the intended process explained here.

The result of the distillation is a liquid called “new make spirit,” also known as “white dog," This liquid called a white dog is the pure distillate that is directly taken off the still and put into new oak barrels that are charred at the cooperage. They are charred because the charring provides a filter for eliminating congeners in the distillate. Congeners are chemicals with active biological elements that affect the human brain after the consumption of alcohol. There is a rating or scaling system of how much the wood staves have been charred, it is graded on a scale of one to five, and even some barrels are charred up to a threshold of six. The different numbers on the scale can be achieved by the length of time the inside of the barrel is put under fire. A number one char is around 15 seconds, and a number five is around 55 seconds. Each of these chars will affect the taste of the bourbon that is stored in them by possibly adding tasting notes such as vanilla, brown sugar, and even caramel.

The cooperages that a distillery uses may be able to track from what land region or tree the oak in the barrel comes, how it is charred, how long it is left to dry out, and where it is stored. A distillery, such as the New Riff Distilling in Covington, KY, will receive these barrels and assign the barrels to certain batches.

Glass bottles are also tracked. There are many glass suppliers around the United States, and each has a special way of marking the glass bottles produced to show where and when they were made. Information such as when the bottle was manufactured can be seen on each bottle. In the manufacturing and distribution of bourbon, almost every part of the process and component can be tracked in the supply chain process.

Infrastructure To Track The Supply Chain Process

To this point, tracking the many different components of the bourbon supply chain is done manually, and the data is stored on centralized systems that must share data amongst disparate platforms.

This continues through the final distillation and shipping of bourbon or wine to its end destination and does not allow for the transparency of the process to all the participants involved in the journey. There is an understanding that some of this information is proprietary such as a recipe, and should be kept secret.

The ability to authenticate that a bottle has the original contents and has not been tampered with is valuable to the producer and the end buyer. Plus, blockchain technology like Ethereum and its smart contracts capability eliminates tedious and time-consuming manual tracking and entries and provides automation.

The technologies that are used in this report to allow for the precise tracking and location of the assets are listed below:

The Ethereum Blockchain
IoT sensors for barrels and bottles
Wireless RFID/IoT scanners
Mobile Wireless technologies
“Smart Barrel” Tags
“Smart Bottle” Tags

The Ethereum blockchain will be used to process the immutable supply chain data. Blockchain technology has evolved from the original system that Bitcoin was created on, which allowed for the interaction of buying cryptocurrencies on the blockchain that uses smart contracts to enforce business rules and logic.

Smart contracts are very useful for supply chain applications; they can provide for the automation of payments to suppliers and vendors when certain conditions have been met. IoT devices can provide state changes that can be recorded and acted upon in smart contracts, such as in the use of vibration and temperature sensors.

In researching this paper, the current alcohol and liquor distribution processes in states such as Ohio could be studied to see what command and control processes are in place for proper disbursement.

As mentioned earlier, Ohio is considered a “control” state and must have limited and allocated distribution. All liquor in Ohio must be distributed through centrally controlled and controlled physical locations. All liquor that is to be sold in the State of Ohio is stored and inventoried in either a DHL Logistics warehouse in southern Columbus or the town of Green. Both warehouses are centrally located to serve different regions of the state. Other states like Kentucky do not have this allocated or controlled distribution. A visit to the joint DHL and Jobs Ohio-run warehouse in the southern suburb of Groveport, OH, provided an idea of the large volume of liquor that is received, stored, and shipped to local state-regulated liquor agencies in that region. There are 16,000 cases of liquor shipped a week from this facility. All these cases received and transported out require manual scanning for the input of the chain of custody.

Bourbon and other liquor are delivered to these warehouses on pallets from the distiller and broken down into individual cases. Currently, these cases are picked by humans to fulfill orders from liquor stores that serve as state liquor agencies for wholesale accounts or sales directly to retail customers. All of this movement of the cases and bottles is captured in a closed system, and this system is Microsoft AX. Several centralized database systems can record all the locations of the cases of liquor and wine in the warehouse, what pallet each box gets loaded on, and what pallet gets loaded onto one of the DHL trucks or trailers.

At this point in the journey of the bottles of bourbon or wine, there is no visibility of an original batch to where the end destination will be. The only information that a bourbon distillery will get is the number of cases or bottles sold from that warehouse; no more specific information is available.

Tracking the physical bottles of bourbon could be accomplished in several different ways after it has been distilled and aged for approximately four to five years.

As mentioned earlier, the batches of distilled bourbon are tracked in the distillery with centralized systems such as Whiskey Systems. This system allows for barrels to be inventoried and their location tracked in the rickhouse. These barrels are tracked by hand, and the writing on the bourbon barrel head can include the distiller permit number, where the batch was distilled, and the date that it was distilled. Some distilleries even use QR codes or bar codes to mark the barrels.

Even though the location will be tracked in a centralized system at the distillery, it must be logged where that barrel is. Suppose there was the ability to put an RFID tag or other IoT sensor on the barrel that could withstand temperature fluctuations and moisture and was impact resistant. In that case, it could be read by a scanning device to help identify its location. If using RFID tags, some special considerations, such as shielding, need to be accounted for.

If the “Smart Barrel’ IoT tag was standardized amongst the barrel cooperages and the distilleries, it could be installed after assembly and tracked when shipped to a certain location. The distillery could use that barrel and scan in the IoT sensor information. That information or transaction could trigger a smart contract to update its status and location on the Ethereum blockchain. This transaction would help provide data on where that barrel went and when it was delivered. As that immutable information is stored on-chain, it could help provide insight into what barrel was used with what batch and if the barrel could be utilized a second time in the sister craft beer production industry. Craft beer breweries use old bourbon barrels to store certain craft beer styles, such as stouts and barley wines. Normally these styles are higher in ABV. This is alcohol by volume and refers to the content of a drink that is pure alcohol.

Once the manufacturing process of the new make spirit has been completed, it will now get poured into these barrels and sent to the rickhouse to be stored for at least four years to be considered bourbon and not just whiskey. One of the ideas discussed with Kevin Bass, creator of the Bourbon Coin, during the research of this paper is that an actual spirit sample could be taken from the barrel before sealing the barrel. This sample could then be analyzed for its chemical properties and makeup to create a DNA record called a WdNA. There are certain traits for the chemical makeup of bourbon, and they can be identified by such things as tannins and characteristics derived from the barrels that they were stored in. Such unique characteristics include Phenol, cresols, xylenol, and guaiacol. These are the most important compounds in whisky in terms of contribution to flavor. There could be the ability to track these compounds and others to create that WdNA signature as it went into the barrel. That signature entry could execute a smart contract to store location, date, batch number, distiller, and chemical properties.

The WdNA signature would be unique, and it could be released for the pre-purchase of a bottle that would be receiving that particular batch. There could be the offering of that specific bottle to owners of a specially minted NFT equating a digital asset to an actual physical bottle of bourbon. For example, suppose New Riff Distilling would want to do a special version of their rye whiskey with a special maple stave inserted into the barrel before the aging process. In that case, they could take the WdNA sample before the barrel is sealed and store it in a specially sealed glass vial. This sample could then have the chemical properties analyzed and stored in an NFT to have a permanent record. Once the aging process is over, that barrel’s contents would be bottled in 750 ml bottles and ready for shipment.

How could there be a way to ensure that a specific batch matches what is going into the correct bottles? This is an application where a special RFID “Smart Bottle” tag could be made for the bottle cap or wrapper assigned to the same batch of the prescribed WdNA bourbon. With the WdNA signature and the correct trackable bottle seal, it would be possible to identify its location and if it had been tampered with during transport or upon delivery.

Continuing through the supply chain process, this new verified bottle with the IoT wrapper or bottle cap would have the ability to be tracked in whatever cardboard case it’s put in. The IoT tag could be either an RFID tag that a proximity sensor would read or computer vision could be used to recognize a QR Code on the cap or label as it is inserted into the case.

(Figure 2: IoT and Blockchain Entry Points)

At the distillery or the vineyard, the cases of bottles could be loaded onto a pallet. This pallet could have an IoT tag attached that could act as a special “smart” pallet tag. IntelliPallet by Pallet Alliance has a pallet solution that could provide this function. The pallet could then be tracked, such as the cases with proximity sensors or using computer vision. The scan result would add an entry to the Ethereum blockchain to show the most recent event in the chain of custody.

At this point, the record could be updated to show its history from the corn crop used to make the whisky mash, all the details of the distilling process, including the WdNA, and what packing it was sitting on for transport. The journey could be displayed in a graphical form on a Web3 distributed application or a mobile application and updated in real time.

(Figure 3: Mobile App/DApp)

Depending on the amount of detail needed for monitoring the pallet in transportation, 4G and 5G wireless devices could be attached to the smart pallets. There are devices available that can utilize new high-speed 5G cellular networks, such as T-Mobile or AT&T. Some of these devices can even use satellites for tracking the pallets. Digital Matter is one such company that offers many different pallet tracking technologies. This would allow the location to be always known during the transport in the delivery vehicle. It could also identify if there is any tampering or removal of cases from the pallet. This may seem like overkill, but if there are bottles valued at over $1,000 apiece and there could be 12 bottles per case, the return on the investment could be warranted.

Towards the end of the journey, the bottle would eventually get delivered to possibly a retail wine or liquor store, maybe to a distributor’s warehouse (such as the OHLQ and DHL warehouse mentioned earlier in the paper). If the bottle is being bought by a consumer and the Bluetooth IoT sensor was still in the cap on the bottle or attached, then it could be read by a smartphone and trigger a couple of events. One of the events could be the display of the journey that the bottles and contents took to end up in a video or web page. Suppose the consumer traded cryptocurrencies and could receive NFTs. In that case, the second event could be the minting and issuance of an NFT that showed ownership, and they could receive other free offerings from the distillery or vineyard in electronic form. This scan would also trigger the update to the Ethereum blockchain and allow any NFT’s metadata to be updated to show the new location and owner.

NFT Marketplace & Trading Platform For Bourbon & Wine

Non-fungible tokens (NFTs) have started to take off in the blockchain space. A non-fungible token is a token that cannot be exchanged for a like-to-like asset representing the same value. Such an asset could be a United States dollar bill, you can exchange a dollar bill for another dollar bill, and they represent the same value even if they have a different serial number. Digital assets are becoming more and more commonplace, such as photos, music, and even rare digital art. Utilizing the Ethereum blockchain to show ownership of these assets is one of the best use cases developed, as there will always be a record.

The other valuable alcohol asset in this paper is wine. There is a very lucrative market for aged and rare bottles of wine. Grapes are grown worldwide in the most mountainous regions in many different parts of the world. Some well-known regions include Italy, France, the United States, and Spain.

In California, here in the US, wine is big business. California has 4,200 wineries, 5,900 grape growers, 620,000 acres of wine grapes, and over 240 million cases of wine sold out in this state annually. Wine is normally produced in mountainous regions with a temperate climate. The wine industry is very lucrative and provides a vast number of options to the consumer when looking for a specific style or kind of wine.

As mentioned earlier in this paper, bottles of bourbon and wine can become very valuable for different reasons such as availability, special releases, age, and other reasons. In the market of extremely valuable bottles of bourbon and wine, NFTs allow the ability to provide fractional ownership of barrels, casks, or even bottles of alcohol. This is something that Metacask is doing for barrels of rare Scotch or Irish Whisky. Metacask has created the ability to take very old, rare, and valuable barrels of Scottish whiskey and auction them off to recipients that have gone through a KYC (Know Your Customer) process to verify that they’re permitted to purchase these assets.

A winemaker that is utilizing the use of NFTs to sell their wine is Hello Fam. This producer will only sell their wines to holders of the specially minted NFTs. And there is no distribution outside of that process. Some of the lucky NFT holders could receive a special release bottle based on their minted NFT. There have also been famous NBA star players that have created their brands and sold them only to owners of specific NFTs, such as Yao Ming.

NFTs are normally sold or traded on a marketplace that allows people to purchase them from certain collections and resell them for profit. Normally these assets are digital images that could be of a mammal with different clothing articles or a collection of photographs taken in many different places with the same base image or individual. Some of these even reach values of up to thousands of dollars. The ability to sell highly valuable assets to one specific buyer or a fractionalized form is a very strong capability.

The use of NFTs in this report would be used to represent the ownership levels of these rare and collectible bottles of bourbon or wine. The concept of minting new NFTs representing a coin assigned to the share of ownership of a specific bottle or case of wine could look like the one below.

(Figure 4: Wine Crypto Coin)

The Wine Crypto Coin NFT could be sold and stored in a cryptocurrency wallet such as Metamask or Trust Wallet. This coin could be used specifically for one vineyard, or it could be used across many more if there was additional participation from other ones. This NFT could also be sold on an NFT marketplace built directly for trading and buying wine shares, or it could be sold on other NFT marketplaces, such as OpenSea.

(Figure 5: Bourbon Coin NFT)

The Bourbon Coin NFT would be remarkably like the Wine Coin NFT and allow for the fractional ownership of bourbon barrels. Once these barrels are drained into bottles there could be the minting of new NFTs to represent each bottle. The purpose of the bourbon token could be to identify when a certain batch of bourbon has been created and distilled. This token could be minted as the batch is distilled onsite. There could also be the use of creating an NFT to represent the same process. Once the token/NFT has been minted, that could represent ownership of a barrel or specific bottle. Almost a serial number of sorts. This token or NFT will allow for trading a specific bottle, a fractional share of a barrel, and possibly a whole bottle. This becomes extremely attractive to the bourbon collector who wants to own something rare. The blockchain allows for the whole or fractional ownership of an asset. This is illustrated by the possible fractional ownership of the real estate. Fraction is one company working on trading tokens that could represent the fractional ownership of a beach house or an apartment in downtown Chicago. The buyer isn’t required to provide all the capital for the asset and can share the initial buy and profit from the eventual sale with other purchasers. These NFTs or coins help provide ownership to a population that may not have had the resources before to do this.

Conclusion

The high-end bourbon and wine market have provided the ability to invest in an asset that can appreciate with great returns over time. As with any asset before blockchain technology, their value and ownership were speculative and held in a closed system. Value in a closed and centralized system can be controlled and manipulated. Blockchain technology did not create the ability to set value and distribute wealth from these assets. It has brought transparency, immutability, and accountability to these assets. These benefits or capabilities are only provided if certain processes and technology are available.

This paper was written to show the advantages of introducing different technologies into the different supply chains to help increase efficiencies in documenting, tracking, and authentication of whole or fractional ownership of these interesting assets. There is the ability to increase efficiencies in a phased approach in applying all this to these unique and popular industries.

Tracking Bourbon on the Blockchain

Get The Latest News And Updates From Phemex!

Introduction

Rare Bourbon and Wine Prices

The Bourbon Distillation & Distribution Process

Why Does The Placement Of The Barrel Bourbon In The Rickhouse Give A Batch Of Bourbon Different Characteristics?

The Bourbon Supply Chain

Infrastructure To Track The Supply Chain Process

NFT Marketplace & Trading Platform For Bourbon & Wine

Conclusion

References

Get The Latest News And Updates From Phemex!

Register On Phemex Now To Begin Trading

Register On Phemex

Get The Latest News And Updates From Phemex!

Get The Latest News & Updates!