ERC-20 has practically become the industry standard for all projects built on the Ethereum blockchain.
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wETH or Wrapped Ethereum is the ERC-20 compliant representation of ETH. Simply put, wETH is Ether “wrapped” with Ethereum’s ERC-20 token standard. Now that wETH is essentially the same value as the underlying Ethereum entity, why exactly do we need wETH at all?
ERC-20 token standard
At this point, ERC-20 has practically become the industry standard for all projects built on the Ethereum blockchain, mainly due to its transparency and flexibility. As such, most decentralized apps, crypto wallets, and crypto exchanges typically provide native support for all ERC-20 tokens. The problem with this is that the ETH token is not fully compliant with the ERC-20 token standard as ETH came way before the implementation of the ERC-20 technical standard.
Now ERC-20 tokens can only be exchanged with other ERC-20 tokens and therefore ETH is not tradable with any ERC-20 token. The Ethereum network created Wrapped Ethereum to solve this exact problem, allowing wETH to work to facilitate trading of ETH and other ERC-20 tokens.
Since wETH is tied 1:1 to the price of ETH itself, the two are essentially the same in terms of value and investment security. Of course, the main difference between the two lies in their use cases. Unlike ETH, wETH cannot be used to pay Ethereum gas fees. Instead, it can help with investing and staking processes on Ethereum-based decentralized platforms. wETH can also come in handy in crypto lending, NFT trading, and providing liquidity to various liquidity pools, among others
Creation of wETH
wETH is created by sending existing ETH tokens into a smart contract programmed to lock said ETH and in return create a corresponding amount of wETH tokens. ETH is locked, so generated wETH is backed by a reserve.
wETH can also be unwrapped through a simple procedure: users just need to return their wETH tokens to a smart contract on the Ethereum blockchain, which will return them a corresponding amount of ETH. The returned wETH is then burned, allowing wETH to continue to maintain its bond with ETH.
As WETH.io puts it, the Ethereum blockchain has plans to update Ethereum’s existing codebase and make ETH ERC-20 compliant, and that would eventually eliminate the need for wETH. However, Wrapped Ethereum is providing significant services at the moment and provides an invaluable solution to Ethereum’s interoperability issues, and it’s certainly not going away anytime soon.
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Disclaimer: This article was written by Giottus Crypto Exchange as part of a paid partnership with The News Minute. Investments in crypto assets or cryptocurrencies are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about investing.
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