What is WETH Wrapped Ethereum?
- Wrapped tokens, like WETH or Wrapped Bitcoin, are tokenized versions of cryptocurrencies that are pegged to the value of the original coin and can be unwrapped at any point.
What is WETH? It is the wrapped version of Ether. Wrapped tokens like WETH are tokenized versions of cryptocurrencies that are pegged to the value of the original coin. They can also be unwrapped at any point. Almost 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 similar to that of stablecoins. Stablecoins are essentially “wrapped USD” pegged to the dollar, that can be redeemed for FIAT dollars at any point. In the same way, WBTC, WETH, and all other wrapped coins can be redeemed for the original asset at any time.
How Does Wrapped Ethereum Work?
Custodians are required to hold the collateral for wrapped tokens. For example, if you want to wrap Ethereum, a custodian will hold your Ether and give you Wrapped Ethereum in return. Custodians can be merchants, multi-signature wallets, or simply a smart contract. You send your collateral to the custodian and a wrapped version of your coin is minted. For example, to attain Wrapped Ethereum, you can simply go to a DEX like Uniswap and swap your Ether for Wrapped Ethereum. Your Ether is converted to Wrapped Ethereum, but the value stays the same, similar to how dollar-pegged stablecoins work.
What Makes Wrapped Ethereum Unique?
Wrapped tokens, like WETH, WBTC, and others, allow tokens to live on multiple chains. For instance, if an investor wants to hold Ether but use it on the Avalanche chain, they would need Wrapped Ethereum to have price exposure to ETH, while not using the Ethereum chain. Doing that increases blockchains’ liquidity and capital efficiency because it allows investors to wrap assets and deploy them on other chains.
In terms of wrapping, Bitcoin and Ethereum are the most popular, as they are seen as a “safe haven” assets in the cryptocurrency space. Investors can retain their BTC and ETH, while using them for yield farming or other DeFi activities by ‘wrapping’. Wrapping coins can also reduce transaction times and fees. Ethereum especially suffers from high gas fees, so wrapping it on another blockchain allows investors to trade Ether at a much lower cost.
On the flip side, wrapping coins means investors have to go through a custodian and take on additional risks that way. Decentralized exchanges may have smart contract risks, while custodians like Thorchain can get hacked. So far, no fully decentralized solution for wrapping coins universally exists. In addition, not all chains can wrap every token. While versions of WETH exist on most major blockchains, the opposite is not always the case.
Are ETH and WETH Different?
Yes, they are. WETH was created because ETH was not feasible to be used for various DeFi applications. Thus, ‘wrapping’ the ETH token in an ERC-20 compatible standard meant that it could easily be used across the wide spectrum of dApps. WETH is equivalent to ETH, meaning there is no price difference between the two. Thus, if you wish to use your ETH to participate on a custom dApp, you may have to convert to WETH to use the app.
Closing Thoughts
The objective of all wrapped tokens is to add an additional layer of interoperability between Ethereum and various web 3 networks.
