What Is Wrapped Ethereum (WETH) How Does it Work
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What Is Wrapped Ethereum (WETH)? How Does it Work?

Introduction

Wrapped tokens, like Wrapped Ethereum (WETH) or Wrapped Bitcoin (WBTC), are the tokenized versions of cryptocurrencies that are pegged to the value of the original coin and can unwrap at any point.

What Is Wrapped Ethereum (WETH)?

Every major blockchain has a wrapped version of its native cryptocurrency, like Wrapped BNB, Wrapped AVAX, or Wrapped Fantom. The mechanism of such coins is like that of stablecoins. Stablecoins are essentially “wrapped USD” because dollar-pegged stablecoins can redeem for FIAT dollars at any point. Similarly, WBTC, WETH, and all other wrapped coins can save for the original asset.

Wrapped coins solve a particular problem:

Because of the low interoperability of blockchains, native currencies of one chain cannot operate on another. For example, you cannot use Bitcoin on the Ethereum blockchain, and you cannot use Ether on Bitcoin or Avalanche. Wrapping coins solves this issue by tokenizing them. And using the blockchain’s token standard to the tokenized version of the initial cryptocurrency.

On Ethereum, all fungible tokens follow the ERC-20 standard formed in 2015. They have designed this token standard to have a standardized set of rules for tokens on Ethereum, which simplified new token launches and made all tokens on the blockchain comparable. Mandatory laws all ERC-20 tokens have to follow are the total supply, balance, transfer, transfer from, approve, and allowance. Unfortunately, Ether itself does not concede with the ERC-20 standard. They wrapped in Ethereum development to increase interoperability between blockchains and make Ether usable in decentralized applications (dApps).

Are ETH and WETH Different? wrapped ethereum vs ethereum

Yes, they are. Wrapped Ethereum (WETH) follows what we know as the ERC-20 standard, while ETH does not. WETH created because ETH was not workable for various DeFi applications. Thus, wrapping the ETH token in an ERC-20 compatible standard could easily use across the broad spectrum of dApps. Also, users can create their versions of tokens for their custom DeFi applications.

Now, in the point of WETH, it is comparable to ETH. It shows that there is no price distinction between ETH and WETH. Thus, if you expect to use your ETH to experience on a custom dApp, you can effortlessly transform it into WETH on a dApp, like 1 inch, and then continue using it.
Remember that ERC-20 is a technical standard for publishing tokens on the Ethereum blockchain. It simply dictates the effects of the token. One of the most important parts of an ERC-20 token is that it is fungible, so one token will consistently be exchangeable for another of the same value.

How Does Wrapped Ethereum Work?

Wrapped tokens require custodians to hold the collateral. For instance, if you want to wrap Ethereum, a custodian will have your Ether and deliver you Wrapped Ethereum (WETH) in return. Custodians can be vendors, multi-signature wallets, or absolutely smart contracts. You send your collateral and a wrapped version of your coin mint to the custodian. For instance, with Wrapped Ethereum (WETH), you could go to a DEX like Uniswap and swap your Ether for Wrapped Ethereum (WETH). The actual Ether changes to Wrapped Ethereum (WETH), but the value remains the same, equal to how dollar-pegged stable coins work.

On the Ethereum blockchain, Wrapped Ethereum needs to swap between tokens on decentralized applications. For example, some decentralized applications cannot work with Ether as collateral but just with Wrapped Ethereum (WETH). While Ether is required to pay for gas, WETH is an ERC20 token that can swap for other ERC-20 tokens on DeFi applications. Other blockchains may have their version of Wrapped Ethereum (WETH), producing a mirror image of Ether on their blockchain.

Benefits of Using WETH.

There are several advantages to using WETH. WETH is interoperable with other ERC-20 crypto tokens. Since WETH can only mint a custodian, an entity that guarantees its value (e.g., smart contract, dApp, DAO), WETH has higher liquidity than native tokens.

Another benefit of WETH is enhancing security because its custodians use only secure exchanges. Plus, you have more control over your crypto tokens because the custodian keeps the private keys in a safe location.
Finally, WETH has quicker transaction speeds and lower transaction costs comparative to the unwrapped version of the token.

How Do You Unwrap WETH?

If you hold WETH, you can unwrap it and earn ETH. After unwrapping (a.k.a. burning) it, you bring the initial ETH back. They returned the burned WETH as ETH and deposited into the former WETH holder’s crypto wallet.

Like wrapping ETH, you require a wallet, like a Metamask account. Perform the exact steps above but select WETH as the first asset and ETH as the second asset.

Conclusion

All wrapped tokens’ goal is simply to add a layer of interoperability between various networks. For most users, converting a non-native asset like BTC to an ERC-20 consistent token (such as USDT) would not create sense to convert it to WBTC. They will usually use their USDT to bring out most of their transactions. But the purpose of WETH is to create a seamless experience for native ETH token users.

FAQ

  1. What is WETH suitable for?

    WETH is a cryptocurrency that allows users to place pre-authorized bids that can complete later without requiring the bidder to take further action. Ethereum and WETH are The main currencies on OpenSea. OpenSea platform provides users with the opportunity to trade WETH.

  2. Is WETH cheaper than ETH?

    WETH is slightly cheaper. If you have WETH on hand, you'll save a bit of gas by using it directly. When swapping with ETH, they will wrap it into WETH first, with a small gas fee. You can also manually wrap (or unwrap) it in the trade window by “swapping” ETH and WETH.

  3. Is WETH better than ETH?

    WETH has higher liquidity than ETH as it can only mint a custodian (e.g. smart contracts) that guarantees its value. WETH is more secure than ETH as its protectors typically use secure exchanges.

  4. Do you pay gas with WETH?

    WETH is slightly more affordable. If you have WETH on hand, you'll save a bit of gas by using it directly. When swapping with ETH, they will wrap it into WETH first, with a small gas fee.

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