What Is Wrapped Ethereum (wETH) And How Does It Work?
The Ethereum network is undoubtedly the most used network for developing many forms of crypto projects. This has made many developers and traders alike very familiar with the Ethereum blockchain protocols, especially the ERC-20 technical standard.
Even though some users may not truly understand the ERC-20 technical standard of the Ethereum network, they have probably traded or invested in the ERC-20 tokens.
Due to its flexibility, transparency and usefulness which made it the industry standard for Ethereum-based projects, other crypto wallets and decentralized applications (DApps) support ERC-20 tokens.
Now, the only problem is that Ether (ETH) do not align with ERC-20 even though they are both used on the Ethereum network, they are not guided by the same rules and they cannot be traded for each other.
This problem motivated the creation of wrapped ETH which traders can conveniently trade for other ERC-20 tokens. In other words, the Ethereum network introduced wETH to bridge the gap between ETH and ERC-20 tokens and enable traders to trade wETH for ERC-20 tokens and also ERC-20 tokens for wETH.
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What Is Wrapped Ether (wETH)?
Given the name “wrapped Ether”, it was motivated by the notion that wETH is Ether wrapped with ERC-20 token standards. In other words, wETH is the same as ETH which has been configured to have the ERC-20 technical standards. However, this does not make their value any different from each other as the wrapped ETH still has the same value as ETH.
One may wonder if wrapped Ethereum is a good token to trade or invest in since it is not the main ETH. Yes, if you can invest in ETH, then you shouldn’t be scared of investing in wETH because they are the same and also have the same value.
wETH is pegged to ETH price at a 1:1 ratio which makes them the same in terms of value and price. The main difference between the wrapped version of ETH and ETH is in their use cases, just like other coins like wrapped Bitcoin/(wBTC) and BTC.
The wrapped version of Bitcoin called “wrapped Bitcoin’ (wBTC) has the same value as Bitcoin and the wBTC can be used to trade any ERC-20 token.
Wrapping a token is a temporal process because a user can unwrap a token at will. The process of unwrapping Ethereum tokens is quite a simple one. By sending their wrapped Ether (wETH) tokens to a smart contract on the Ethereum network, the same amount of ETH is returned to users.
Think of wrapped tokens like stablecoins which are pegged to the value of their underlying assets, the US dollars. Stablecoins like USDT can be seen as ” wrapped USD” since they have the same value as the dollar and are traded for other tokens where USD cannot be used. They can be unwrapped when they are redeemed for fiat currency(US dollar) at any time.
Through wrapped tokens, the problem of interoperability faced by many blockchains is solved and the exchange of one token to another becomes easier. For example, using wrapped tokens, users of wETH can utilize ETH on the Bitcoin blockchain.
How Does Wrapped Ethereum (wETH) Work?
According to what we discussed earlier, the main difference between ETH and wETH is the use cases. For example, wETH can’t be used to pay gas fees on the Ethereum network because it is an ERC-20 standardized token, even though it has the same value as ETH. Though, it is allowed and used for investment and staking purposes on decentralized apps (DApps).
To wrap Ether tokens, one just needs to send ETH to a smart contract which will generate wETH in return and lock up the ETH as a reserve backing the wETH.
In case the user intends to unwrap the wETH back to ETH, the same process of sending the wETH to the smart contract is repeated, the exchanged wETH is burned and the same value of ETH is sent to the user.
The reason for burning the wETH tokens is to ensure that wETH is still pegged to the value of ETH and the same number of ETH remains in circulation.
Aside from exchanging ETH for wETH on smart contracts in the blockchain, users can amass wETH by simply trading other tokens for it on crypto exchanges like Uniswap and SushiSwap.
According to WETH.io, the main goal of wrapped Ethereum is to update Ethereum’s codebase and make it compliant with the ERC-20 standard. This will automatically nullify the need of wrapping Ether for interoperability purposes.
However, this goal is still a work in progress and until it is fully achieved, wETH is still useful for crypto lending and staking, NFT trading and crypto trading.
How To Wrap Ether (ETH)?
As mentioned earlier, there are two main ways to wrap Ether. The first way is by sending ETH to a smart contract where it will be converted to wETH, the second method is by swapping other tokens for wETH on a crypto exchange.
Let’s discuss how to generate wETH using the below methods;
1. Create wETH Using Smart Contract On OpenSea:
Using the smart contract on the Opensea platform to wrap ETH, you have to follow the steps below;
- Launch Opensea and click on “Wallet” at the top-right corner of the platform. Click on the three dots next to Ethereum and select “Wrap“.
- Enter the amount of ETH you wish to swap to wETH and click “Wrap ETH“.
- After you have clicked on wrap ETH, a metamask pop-up will prompt you to sign the transaction.
The wETH is distinguished from ETH by a pink Ethereum diamond logo and can also be seen in the wallet portion of the OpenSea account.
2. Generate wETH With Uniswap
Uniswap is a decentralized crypto exchange where users can swap tokens for wETH. Using Uniswap requires a user to connect their wallet and select the Ethereum network.
1 After selecting the Ethereum network on Uniswap, click on “Select Token” at the bottom field and further select wETH from the listed options.
- Key in the amount of ETH you wish to convert to wETH and select “Wrap“
The user’s crypto wallet will be used to confirm the transaction and gas fees in ETH will also be paid after the transaction is confirmed.
After the transaction is confirmed from the user’s end and all details are confirmed to be in order, then blockchain confirmation is awaited.
wETH and other wrapped tokens have brought interoperability solutions to the blockchains and also paved way for a more decentralized system where different tokens can be compatible for being exchanged or staked between different platforms.
However, as developers work more towards building better interoperability solutions on the blockchains to accommodate diverse blockchain tokens, wrapped tokens will continue to provide invaluable services to users who make the utmost use of them.