What is Wrapped Ethereum (WETH)? A Complete Guide
Ever since its invention, the crypto market has been going through highly volatile periods. Bitcoin and Ethereum are two of the most popular cryptocurrencies in the market right now and have the biggest market cap as well.
Every day, we see new altcoins getting introduced into the market, and this ensures the expansion of the international crypto market in the long run. If you’re associated with the crypto field, you might already have heard the term “WETH” or “Wrapped Ethereum.”
Just like many other altcoins and popular blockchain projects, WETH is also associated with ERC-20 tokens. This standard makes Wrapped Ethereum flexible and transparent. There’s a lot of support available for ERC-20-supported tokens on crypto exchanges and wallets across the industry.
On the other hand, Ethereum is not ERC-20 compliant, limiting its ability to be exchanged with other cryptocurrencies is supporting the ERC-20 standard.
Since Ethereum is a very popular cryptocurrency, dApps using ERC-20 tokens require a smooth exchange between ETH and ERC-20 tokens. This is why Wrapped Ethereum is developed. WETH makes the exchange of Ethereum with ERC20 tokens seamless.
In this guide, we will show you how WETH works and why it matters.
ETH and Smart Contracts
A guide introducing WETH and its functions would be incomplete without discussing the relationship between Ethereum and smart contracts. There are various dApps built on the ETH infrastructure. These dApps cater to different users and audiences.
Ethereum is the most used cryptocurrency for its ability to create smart contracts in a decentralized environment. These smart contracts are automatically executed when certain requirements are met.
With the help of smart contracts, immutable and transparent transactions are made possible on every blockchain. Whenever specific conditions mentioned in the smart contract are met, the contract executes itself and completes the transaction.
With time, smart contracts are also required by developers to evolve. With the increasing complexity of the technical applications of these contracts, they must also improve themselves in the long run. The latest Ethereum updates have introduced new scripting standards for smart contracts. This is done to help support the latest applications of dApps.
The problem with Ethereum is that its current infrastructure doesn’t support every smart contract and app made on the ETH blockchain. Smart contracts are the backbone of dApps, and are essential to DeFi solutions created on the ETH blockchain. Developers are finding it difficult to use modern smart contracts like ERC-20 with ETH.
What is Wrapped Ethereum (WETH)?
The issue of interoperability between ETH and ERC-20 contracts can be resolved. Wrapped Ethereum is a wrapped version of the original Ethereum token. At the very basic level, we can say that WETH is the wrapped version of Ethereum, and the ETH token is wrapped to make it ERC-20 compliant. That’s why WETH has the same value as ETH tokens.
Since its creation, the credibility of WETH has been the biggest concern for anyone new to its concept. Wrapped Ethereum has the same price as ETH token and is a safe investment tool as well. That is because Wrapped Ethereum is pegged to the price of Ether in 1:1. This keeps the value of both tokens the same at any given time. While everything else is the same, WETH differs from ETH in its use cases.
Just like Ethereum, Bitcoin also has its wrapped version termed WBTC or wrapped BTC. WBTC is also pegged to BTC at 1:1. We can also treat wrapped tokens as stablecoins, as their price is also pegged to the price of their underlying asset. Since stablecoins can be redeemed for their parent asset, wrapped tokens can also be unwrapped or redeemed.
Another important thing every cryptocurrency investor must learn about is the reasons to wrap Ethereum. A beginner might argue that we do not need Wrapped Ethereum since we already have Ethereum, which works perfectly on its blockchain.
However, the main reason behind Wrapping Ethereum is the difficulty we face because of the design of Ethereum and its unique code, which hinders most of its functionality on the blockchain.
Most cryptocurrency developers from around the globe use Ethereum to create smart contracts and run their dApps. Recently, the ERC-721 token standards have been introduced. This token standard offers great help in developing new NFT tokens. ERC-721 and ERC-20 tokens are completely different from one another and behave differently on the blockchain as well.
Due to its unique characteristics and limitations, ETH can’t be utilized by developers for every type of dApp. Since most of the dApps are developed around sending and receiving ERC-20 tokens, developers have to find a way to have their dApp work on the ETH Blockchain.
WETH allows the developers to add ETH into a liquidity pool. This makes providing collateral very easy for developers and makes their tokens interoperable on the blockchain.
Working Mechanism of Wrapped Ethereum (WETH)
The usefulness and features of WETH ensure its fixed price against ETH in the cryptocurrency marketplace. Moreover, since it’s really easy and fast to wrap and unwrap Ethereum, developers and users can ensure fast and reliable transactions as well.
Wrapped tokens can be used by anyone facing interoperability-related issues on the blockchain. For example, you cannot use an ETH token on the Bitcoin blockchain. However, with the help of wrapping, ETH can be converted into a wrapped token and can be made compatible with the token standards of another blockchain. This is how one cryptocurrency can be made useful on another blockchain.
Wrapped Ethereum cannot be used to pay gas fees for ETH-related transactions on the blockchain. However, its key purpose is to make Ethereum compatible with ERC-20 token standards to make it a great way to stake and invest in multiple decentralized applications and blockchains. Users can also use WETH to buy NFTs on different NFT marketplaces.
WETH is generated by locking Ethereum into a smart contract on the blockchain, resulting in the creation of WETH. This way, the original Ethereum is used to back the same amount of WETH, and that is why the value of both these cryptocurrencies remains the same.
Whenever you have to sell your WETH for real ETH, you will have to burn WETH and release the locked-up Ethereum from the smart contract. This is done to keep the price of both these cryptocurrencies the same in the long run. You can also directly buy WETH with other tokens on a few cryptocurrency exchanges.
Can WETH Replace Ether?
Wrapped Ethereum is very useful for the future of decentralized applications which rely on using smart contracts for their functionality. The whole purpose of Wrapped Ethereum is to amend it in a certain way to make it compatible with ERC-20 and other token standards.
The ultimate goal of WETH is to introduce new updates to the Ethereum blockchain and remove the need to convert ETH into WETH. This way, Ethereum will become an interoperable cryptocurrency and wouldn’t have to be wrapped or converted into another cryptocurrency to enhance its functionality.
Currently, the key purpose of WETH is providing liquidity by getting staked on liquidity pools, helping in buying NFTs, and assisting the crypto trading process. Wrapped Ethereum is and will remain in the market as a temporary fix to all the issues faced by Ethereum.
It contains a list of all the possible future upgrades for Ethereum, which will make the cryptocurrency interoperable and highly liquid.
Different Wrapping Methods
Wrapped Ethereum resolves a lot of issues with Ether and makes itself a perfect candidate to be widely used on dApps. There are lots of tools that can be used to wrap Ether and convert it into Wrapped Ethereum. The process works by sending the Ethereum into a smart contract and locking it up to release the same amount of WETH.
Alternatively, WETH can also be bought directly on some cryptocurrency exchanges in exchange for other crypto coins.
Let’s take a look at some popular wrapping methods used for Ethereum.
Using OpenSea to Wrap Ethereum
Using markets like OpenSea is the fastest and the most reliable way of locking ETH and getting WETH in exchange.
- Go into the OpenSea app, and choose the “Wallet” option displayed on the screen.
- Click the three next to the Ethereum option, and choose “Wrap”.
- You’ll be required to put the amount of ETH you want to exchange for WETH. Put the amount and confirm the transaction.
- A smart contract will be generated on the blockchain, and your WETH will be released after locking up the same amount of ETH from your wallet.
- When the MetaMask popup appears, you can provide your signatures to complete the transaction.
- In the end, you’ll receive the confirmation message, along with your WETH in the wallet.
- After the section, you will be able to see WETH in your OpenSea wallet. WETH has a pink ETH diamond
Using Uniswap to Wrap Ethereum
Ethereum can also be wrapped by using Uniswap. Let’s go through the few simple steps you need to take to convert ETH into WETH.
- To start the process, you should connect your cryptocurrency wallet to the UniSwap exchange. After connecting the two, you should choose Ethereum on the Uniswap exchange.
- From the list of options provided on the exchange, you will have to choose WETH/ Wrapped Ether to move forward.
- In the next step, you will be asked to put the amount of WETH you want to receive in exchange for the same amount of ETH. Once you have put the right amount in the box, click on the “Wrap” button.
- Once everything is done, you can verify the transaction from your cryptocurrency wallet and pay the gas fees in the form of ETH tokens.
- Once the transaction gets confirmed on the blockchain, you will receive Wrapped ETH in your wallet.
Using MetaMask to Wrap Ethereum
MetaMask is another great crypto wallet that can be used to wrap Ethereum by only following a few simple steps. Let’s take a look at the steps you need to follow to create WETH in exchange for ETH on the MetaMask wallet.
- On the MetaMask dashboard, look for the “Ethereum” option and click on it.
- In the “Swap To” feature, choose WETH as your option.
- After choosing WETH, you’ll be required to input the desired amount of ETH you want to swap for WETH. To proceed with the transaction, click on “Review Swap” and confirm the transaction amount.
- In the next step, you’ll be shown a window with the WETH to ETH conversion rate shown. The conversion rate should always be 1:1. This means you should always get the same amount of WETH for the ETH you commit.
- After checking the conversion rate and confirming everything else, you can click on the “Swap” option.
- After the transaction gets complete, you’ll receive WETH in your MetaMask wallet.
How To Unwrap Ether (WETH)?
WETH ensures interoperability of the tokens on other blockchains. Moreover, the fact that WETH can be easily generated with the help of ETH wrapped in different wallets and exchanges shows how easily it resolves the issues regarding the interoperability of the Ethereum blockchain.
In addition to the easy wrapping methods, unwrapping WETH is also really easy and simple. Users don’t have to learn any new wrapping or unwrapping methods to go through the process. All you have to do is play with some smart contracts, and you’ll be able to get WETH to use for any purpose.
When using OpenSea to unwrap WETH, you’ll have to go through the steps mentioned above, but this time around, you’ll have to choose “Unwrap Ethereum” instead of “Wrap Ethereum.” The same method can be applied to Unwrap Ethereum on other platforms like MetaMask and UniSwap.
The whole process is the same, but you have to invert all the steps one by one. In addition to all these platforms, other exchanges like Binance can also be used to exchange WETH with ETH.
Wrapped tokens are not limited to Ethereum only, as Wrapped Bitcoin is also available in the crypto market. WETH isn’t only limited to the Ethereum blockchain and can be utilized on other blockchains as well. The benefits of the wrapped version of Ethereum are evident in interoperability, capital efficiency, and good liquidity.
At the basic level, wrapped tokens work just like stablecoins and are wrapped versions of crypto coins just like fiat currencies.
Traders and cryptocurrency investors can use WETH to get access to the Binance Smart Chain. This way, they can access the Decentralized Finance ecosystem. Wrapped tokens can also be used in bringing to mint Wrapped Tokens by staking the original token on the native blockchain.
However, users should always check the credibility of the platform they’re using to get WETH. This will avoid any credibility issues.
The Credibility of Wrapped Tokens
Many users might have credibility issues regarding the use of wrapped tokens. Centralization is the biggest reason why many users still have reservations regarding the use of wrapped tokens. Wrapped tokens can’t be automated on the Ethereum blockchain.
Since there are lots of centralized institutions involved in the wrapping process of cryptocurrencies, it is easy to manipulate and abuse the process.
However, using wrapped tokens is the only way to ensure an interoperable future where every blockchain would be able to seamlessly contact other blockchains around the globe.
This is the true essence of decentralization, which can only be achieved with the help of wrapped tokens. Cross-chain swaps and use in dApps are two of the most prominent uses of wrapped tokens.
Advantages of Wrapped Tokens
Wrapped Tokens make cryptocurrencies like Ethereum and Bitcoin compliant with ERC-20 standards, and every other standard used to create smart contracts on blockchains. Moreover, these tokens are backed by their parent cryptocurrency in a 1:1 ratio.
This proves helpful in keeping the value of a wrapped token exactly equal to the cryptocurrency it’s pegged to. This is just like stablecoins like USDT, PAX, and many others.
By implementing Ethereum into smart contracts, WETH can be created, and it can be used on dApps. This transfers the value and credibility of a cryptocurrency into the DeFi sector and enhances the functionality and liquidity of the coin as well.
Wrapping cryptocurrency tokens makes it possible for investors and developers to ensure a never-ending supply of wrapped tokens for their DeFi apps.
Wrapped Ethereum, or WETH, was the first ever cryptocurrency to be wrapped and presented into the crypto market. Wrapped Ethereum makes ETH compatible with certain token standards and enables us to use Ethereum on many other blockchains without compatibility issues.
The functionality of Wrapped Ethereum has allowed developers and dApps to benefit from the credibility and value of ETH in the DeFi sector. Wrapped ETH can also be easily unwrapped whenever a user decides to get their ETH back.