The ERC-20 technical standard is well-known to traders who use the Ethereum network. They have probably traded or invested in tokens that incorporate it. Its practicality, transparency, and flexibility make it an industry standard for Ethereum-based projects.
Many decentralized apps (DApps), crypto wallets, and exchanges support ERC-20 tokens. One problem is that Ether (ETH), and ERC-20 don’t exactly follow the exact same rules. Ether was created long before ERC-20 was made a technical standard.
Why is wrapped ETH important? ERC-20 tokens cannot be traded with Ether, but only with other ERC-20 tokens. To bridge the gap and allow the exchange of Ether with ERC-20 tokens (and vice-versa), the Ethereum network introduced wrapped Ethereum. However, wETH is an ERC-20 tradable form of ETH.
What is wrapped Ether? (wETH)
wETH, the wrapped version, is Ether. It’s called that because it is Ether “wrapped” using ERC-20 token standards. Tokens and coins wrapped in plastic have almost the same value than their underlying assets.
Is wrapped Ethereum safe to invest and trade in? As far as Ethereum is concerned, the answer is yes. wETH is tied to the price for ETH in a 1:1 ratio. They are basically identical. Wrapped tokens are not different from their underlying assets. This is especially true for older coins such as Bitcoin (BTC), Ether, and Ether.
Wrapped tokens can be considered stablecoins to a degree. Stablecoins can be thought of as “wrapped USD” because they have the same value and underlying asset, which is the United States Dollar. You can also redeem them for fiat currencies at anytime.
Wrapped Bitcoin is also available in Bitcoin. It has the same value and has the exact same currency as Bitcoin. Similar applies to other blockchains such as Fantom or Avalanche.
Wrapped Ethereum tokens may be removed from their wraps after they have been wrapped. The process is easy: Users simply need to send their tokens to a smartcontract on the Ethereum network. This contract will return the same amount of Ethereum.
Wrapped tokens resolve interoperability problems that many blockchains have, and allow for easy exchange of tokens. Users cannot use Ether on the Bitcoin blockchain and Avalanche only on the Ethereum blockchain. Wrapping allows underlying coins to be tokenized and wrapped using a specific blockchain’s token standards. This allows them to be used on the network.
What does wrapped Ethereum (wETH), do?
Unlike Ether however, wETH can’t be used to pay for gas fees on the network. It is ERC-20 compatible so it can be used for more investment and stake opportunities on DApps. OpenSea allows you to sell and buy wETH through auctions.
To wrap Ether tokens, send ETH to a smart-contract. In return, the smart contract will generate Ethereum. ETH is secured to make sure that the wETH is backed up by a reserve.
The wETH exchanged into ETH is destroyed or taken from circulation whenever it is returned. This is to ensure that wETH stays at the same value as ETH. wETH can also easily be traded for other tokens on a crypto exchange like SushiSwap and Uniswap.
What is wrapped Ethereum good for? WETH.io states that the ultimate goal of wrapped Ethereum is to update Ethereum’s codebase and make ERC-20 compliant. This will eventually eliminate the need for wrapping Ether to facilitate interoperability. However, wETH will continue to be useful for liquidity pool liquidity, crypto lending, and NFT trading.
It’s not a question of ETH or wETH, since wrapping Ethereum is more a temporary solution than a permanent one. Ethereum seems to be getting closer to better interoperability with the many upgrades that are planned for the Ethereum network in the coming years.
How to wrap Ether(ETH)?
There are many ways to wrap Ether. One of the easiest ways to wrap Ether is to send it to a smart contract. A crypto exchange allows you to swap wETH for another token.
Let’s take a look at the three methods to generate wETH as described in the sections below.
OpenSea uses the smart contract wETH on OpenSea
This example will use the OpenSea platform for converting ETH to Ethereum using the wETH smart contracts.
Click on “Wallet” in the upper-right corner. Next, click on “Wallet” in the top-right corner of OpenSea and then select “Wrap”.
Next, enter your ETH amount to convert to wETH. Next, click on “Wrap Ethereum.” This will invoke the wETH smartcontract to convert ETH to wETH.
An alert pop-up called MetaMask will prompt the user to sign the transaction.
Once the wrap is completed, a confirmation message will be displayed.
The wallet portion of an OpenSea user’s account will display the converted wETH. As its logo, the wETH will have a pink Ethereum diamond.
Uniswap allows you to generate wETH
Uniswap requires that a user connects their wallet to ensure that the Ethereum network has been selected.
Next, click on “Select Token” at the bottom of the screen and choose wETH from among the options.
Enter the amount of Ethereum to be converted into wETH, and then click “Wrap.”
The user’s crypto wallet will need to confirm the transaction. At this point, gas fees in ETH and other fees will need to be paid. After all details have been completed and the transaction is confirmed by the user, it’s time to wait for confirmation in the blockchain.
MetaMask allows you to generate wETH
After opening the MetaMask wallet you will need to verify that the network selected is “Ethereum Majornet”. Then click “Swap.”
Next, choose wETH in the “Swap to” field.
Next, enter the amount of ETH you wish to swap. Then, click “Review Swap.”
A window will open displaying the current conversion rate. The conversion rate of ETH to wETH should be 1:1. Click “Swap” to complete the transaction.
How do you unwrap Ether?
You can also unwrap Ether manually by interfacing with a smart-contract. ETH, for instance, can be unwrapped the same way it can be wrapped using the wETH smart contracts on OpenSea. Only difference is that the user must click “Unwrap Ethereum” instead of clicking on “Wrap Eth.”
You can also swap wETH back into ETH using MetaMask or Uniswap. Unwrapping is the same process as for wrapping ETH on both platforms. Only difference is that you need to change the values (from wETH and ETH).
What are the potential risks associated with using wrapped tokens
Vitalik Buterin, co-creator of Ethereum, pointed out one of the major disadvantages of wrapped assets. Buterin says that the main problem with many wrapped assets is their insensitivity to centralization.
Wrapping assets cannot be automated using the Ethereum blockchain as they are not Turing-complete. Wrapping is typically done using central programs. This raises the possibility of manipulation and abuse.
Wrapped tokens are issued on third-party platforms, which in turn subject central entities to decisions regarding wrapped assets. Buterin expressed concern about the possibility that such a mechanism could undermine the core principles decentralization, transparency and trust that the blockchain industry is committed to.
Future of wrapped tokens
Wrapped tokens allow blockchains to communicate with each other. This creates a more decentralized ecosystem where tokens can easily be traded and exchanged across different platforms.
There are better interoperability options on the horizon. These include updating the codebases of blockchains to make them compatible with one another or using bridge chains. At least for Ethereum, the plan is eventually to phase out wrapped tokens such as wETH along with network developments.
Wrapped tokens will not disappear anytime soon, however. Wrapped tokens will still play an important role in providing valuable services to those who require them. Wrapped tokens can be used to stabilize different blockchains by helping maintain stable prices.
They are also useful in facilitating cross-chain atomic trades which are growing in popularity. Wrapped tokens will become less important as blockchains become interoperable over time.
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