What Is Wrapped Ethereum? How Does It Work?
Everything you need to know about wETH
As the crypto market continues to expand and diversify, crypto enthusiasts and traders are introduced to various new words and concepts, and wETH is one of them.
While Bitcoin and Ethereum dominate the crypto market, wETH is quickly becoming a household name in the world of decentralized virtual currencies.
WETH was born from the need for seamless interoperability between Ether and ERC-20 tokens which are the two most important components of the cryptocurrency ecosystem. ERC-20 is a token standard that promises flexibility, transparency, and practical outcomes, making it an attractive option for developers of decentralized apps (dApps).
However, Ether, the native cryptocurrency of Ethereum, is not compatible with ERC-20, making it difficult for traders to exchange Ether for ERC-20 tokens and vice-versa.
So what’s the solution?
Enter: Wrapped ETH, which solves this problem by bridging the gap between Ether and ERC-20 tokens.
WETH allows traders to seamlessly exchange Ether for ERC-20 tokens, enabling them to participate in emerging dApps and other decentralized exchanges that support ERC-20 tokens.
Still, puzzled? No worries. In this article let’s explore the world of Wrapped ETH, how to wrap and unwrap ETH, and its benefits. Let’s dive in.
What is Wrapped ETH?
wETH is an ERC-20 token that is essentially a representation of ETH, pegged 1:1 with the value of ETH.
This means that while ETH itself may not be compatible with many decentralized finance (DeFi) protocols and applications, wETH can be used as an intermediary to interact with these platforms.
So, what's the difference between a token and a coin? Coins are digital assets that run on their independent blockchain, while tokens are built on top of existing blockchain infrastructure.
Coins are typically used as a form of currency or store of value, while tokens can represent anything from loyalty points to digital assets. To help illustrate this, think of the difference between fiat currency (like the US dollar) and a gift card. Both have value and can be used as a form of payment, but they exist on different platforms. Fiat currencies are independent, while gift cards rely on someone else's payment infrastructure and ecosystem.
In the same way, Bitcoin (BTC) is a coin because it runs on the Bitcoin blockchain and helps validate transactions, while ETH is a coin because it runs on its native Ethereum blockchain. So, when it comes to wrapped ETH, it's simply a token built on the Ethereum blockchain that represents ETH and allows for compatibility with DeFi protocols and other blockchains.
What's the Difference Between WETH and ETH?
WETH, or Wrapped ETH, is an ERC-20 token that serves as a representation of ETH with a 1-to-1 peg.
This means that for every WETH in circulation, an equivalent amount of ETH is locked up in a smart contract. And here's the catch, the locked ETH can only be accessed when the same amount of WETH is returned and converted back to ETH.
In essence, wETH is a derivative of ETH, allowing you to interact with DeFi protocols and applications where ETH can't be used. It's like a gift card to the DeFi world, while ETH is legal tender.
The beauty of WETH is that the 1-to-1 peg between ETH and WETH is maintained through Smart contracts. It's predefined in the smart contract code, ensuring that the redemption price stays at 1-to-1.
Why Wrap ETH?
Reasons for wrapping Ethereum would also be a key element in a handbook on "how wrapped Ethereum works."
Beginners might question why they require wrapped ether when they can use ETH on the Ethereum blockchain. The technical distinctions in the way Ethereum tokens are designed are the best approach to comprehending the rationale behind Ethereum's packaging.
The Ethereum network aids developers in establishing new guidelines and standards to support the cryptocurrency industry. For instance, the ERC-721 token standard has been a key aspect of NFT development. In contrast to ERC-20 tokens and ETH, the ERC-721 tokens will function differently.
Even while developers can customize the creation of digital assets, not all dApps can use ETH. Finding ETH uses is crucial given the adoption of dApps for ERC-20 token acceptance in staking and investing applications.
The seamless interoperability of tokens across the entire blockchain ecosystem is the main advantage of wrapped tokens. Plus, ERC-20 token versions of Ether can be used to add Ether to a liquidity pool or use it as collateral.
How to Wrap Ethereum?
Wrapping ETH on OpenSea
The OpenSea NFT marketplace offers a reliable and user-friendly platform for converting Ether into WETH. To wrap ETH on OpenSea, you simply need to follow these steps:
Click on the "Wallet" option in the top-right corner of the app.
Select "Wrap" from the options near the Ethereum option.
Input the amount of ETH you want to convert.
Click "Wrap ETH" to initiate the smart contract conversion process.
Confirm the transaction through MetaMask. You'll receive a confirmation message and find the wrapped ETH balance in your OpenSea account wallet.
Wrapping ETH on Uniswap
Uniswap is another popular platform for wrapping ETH. Here's what you need to do:
Connect your wallet to Uniswap and select the Ethereum network.
Click "Select Token" and choose WETH.
Enter the amount of ETH you want to convert.
Confirm the transaction through your wallet.
Wait for the final confirmation on the blockchain.
Generating WETH with MetaMask
MetaMask, a popular crypto wallet, also makes it easy to wrap ETH with a few simple steps:
Choose the "Ethereum Mainnet" option on the MetaMask wallet.
Click on the "Swap to" field and select WETH.
Input the amount of ETH you want to convert.
Review the conversion rate and details.
Confirm the transaction by clicking "Swap." You'll see the WETH balance in your MetaMask wallet after confirmation.
How to unwrap Ethereum?
It is also possible to manually un-wrap eth using a smart contract.
To wrap and unwrap ETH in the same way, use the wETH smart contract on OpenSea. The only change is that the user must choose "Unwrap wETH" rather than "Wrap ETH."
The same is true if you use Uniswap or MetaMask to convert back from wETH to ETH. On both systems, unwrapping ETH follows essentially the same steps that wrapping it did earlier. The only difference should be the values (from wETH to ETH).
Can ETH Be Wrapped On Different Blockchains?
Other wrapped versions of ETH are available on significant blockchains, enhancing ETH's interoperability.
For instance, using wrapped ETH on the BNB Smart Chain (BSC) enables trading or use of wETH inside the BSC DeFi ecosystem. To accomplish this, you must transfer ETH into your BSC wallet from Binance or another exchange. Before withdrawing, confirm that your exchange enables the conversion from ETH to wETH.
You can also make use of a bridging service. These DApps are third-party programs that take cryptocurrency, store it on the source blockchain, and then create wrapped tokens on the destination blockchain at a 1:1 ratio.
Although bridging tokens frequently works well, moving tokens across blockchains may be risky. Some bridges' smart contracts have occasionally been compromised. Before employing a platform's bridging services to bridge-wrapped Bitcoin, wrapped Ethereum, or another token, do your homework on the platform.
Potential Dangers of Wrapped Ethereum
Vitalik Buterin, the co-creator of Ethereum, has expressed his concerns about the potential dangers of wrapped tokens. He claims that wrapped tokens are vulnerable to centralization and that many of these wrapped assets have major issues with centralization.
At the moment, wrapping assets cannot be automated on the Ethereum blockchain, so they are typically performed via central programs, raising concerns about potential abuse and manipulation. Wrapped tokens that have already been issued rely on the third-party platforms that issued them, making decisions over wrapped assets susceptible to centralized bodies.
Why is the Price of wETH the Same as ETH?
ETH is converted to wETH in a 1:1 ratio to preserve the peg between the two. If wETH were more affordable, individuals would purchase it and sell it for ETH to earn a profit, which would raise the demand for and price of wETH.
Conversely, if wETH were more expensive, individuals would buy ETH and convert it to WETH to sell, causing the supply of WETH to increase and its price to decrease. These supply and demand fundamentals keep the peg between WETH and ETH largely steady.
The future of wrapped tokens may look different as advancements in interoperability solutions are made.
Updating blockchains' codebases to be compatible with one another or using bridge chains are just a few of the solutions on the horizon. For Ethereum, the goal is eventually to phase out the use of wrapped tokens like wETH as the network evolves.
Despite this, wrapped tokens will continue to play a valuable role in the near future.
They provide a stabilizing force in a decentralized ecosystem and make cross-chain transactions possible. As blockchains become more interoperable, wrapped tokens may become less necessary, but their impact will continue to shape the future of decentralized technology.