Traders using the Ethereum network are familiar with the ERC-20 technical standard and have most likely traded and invested in tokens using it. Finally, its practicality, transparency, and flexibility have made it the industry norm for Ethereum-based projects.
Therefore, many decentralized applications (DApps), crypto wallets and exchanges natively support ERC-20 tokens. However, there is a problem: Ether (ETH) and ERC-20 do not follow exactly the same rules, as Ether was created long before ERC-20 was implemented as a technical standard.
So, why is wrapped ETH important? In short, ERC-20 tokens can only be traded with other ERC-20 tokens, not ether. To fill this gap and enable the exchange of Ether for ERC-20 tokens (and vice versa), the Ethereum network introduced Wrapped Ethereum (wETH). However, wETH is the ERC-20 tradable version of ETH.
What is Packaged Ether (wETH)?
As mentioned, wETH is the wrapped version of Ether and is so named because wETH is essentially Ether “wrapped” with ERC-20 token standards. Wrapped coins and tokens have virtually the same value as their underlying assets.
So, is packaged Ethereum safe to trade and invest in? The answer is yes as far as Ethereum is concerned. wETH is pegged 1:1 to the price of ETH, so they are basically the same. The only difference between wrapped tokens and their underlying assets are their use cases, especially for legacy coins like Bitcoin (BTC) and Ether.
Wrapped tokens are like stablecoins to some degree. Come to think of it, stablecoins can also be considered “wrapped USD” because they have the same value as their underlying asset, the US dollar. They can also be redeemed for fiat currencies at any time.
Bitcoin also has a wrapped version called Wrapped Bitcoin that has the same value as Bitcoin. The same applies to other blockchains such as Fantom and Avalanche.
Wrapped Ethereum tokens can be unwrapped after wrapping, and the process is simple: users just need to send their wETH tokens to a smart contract on the Ethereum network, which then returns an equal amount of ETH.
Wrapped tokens solve interoperability issues that most blockchains have, allowing one token to be easily exchanged for another. For example, users typically cannot use Ether on the Bitcoin blockchain or Avalanche on the Ethereum blockchain. Wrapping tokenizes the underlying coins and wraps them with the token standards of a given blockchain, enabling their use on that network.
How does wrapped Ethereum (wETH) work?
Unlike Ether, wETH cannot be used to pay gas fees on the network. However, since it is ERC-20 compliant, it can be used to provide more investing and staking opportunities on DApps. wETH can also be used on platforms like OpenSea to buy and sell via auctions.
Ether token packaging involves sending ETH to a smart contract. In return, the smart contract generates wETH. Meanwhile, ETH is locked to ensure wETH is backed by a reserve.
Whenever wETH is exchanged back into ETH, the exchanged wETH is burned or retired. This is done to ensure that wETH remains tied to the value of ETH at all times. wETH can also be acquired by swapping other tokens on a crypto exchange such as SushiSwap or Uniswap.
So what’s the point of packaged Ethereum? According to WETH.io, the ultimate goal is to update Ethereum’s codebase and make it itself ERC-20 compliant, eventually eliminating the need to package Ether for interoperability purposes. But until then, wETH remains useful in providing liquidity for liquidity pools, as well as crypto lending and NFT trading, among others.
In short, it’s not really an ETH vs wETH issue as Ethereum packaging is more of a workaround than a permanent solution. With the number of upgrades planned on the Ethereum network over the years, Ethereum seems to be moving closer to better interoperability by the day.
How is Ether (ETH) packaged?
There are several ways to package ether. As mentioned, one of the most common ways is to send ETH to a smart contract. Another method is exchanging wETH for another token via a crypto exchange.
Let’s look at three ways to generate wETH in the following sections:
Use of the wETH Smart Contract on OpenSea
In this example, we use the OpenSea platform to convert ETH to wETH using the wETH smart contract.
First, click on “Wallet” in the top right corner of OpenSea. Then click on the three dots next to Ethereum and select “Wrap”.
Next enter the value for the amount of ETH to be converted to wETH. Then click “Wrap ETH”. This will invoke the wETH smart contract to convert ETH to wETH.
A MetaMask pop-up appears and prompts the user to sign the transaction.
Once the wrap is complete, a confirmation message will appear.
The converted wETH is displayed in the wallet part of the user’s OpenSea account. wETH will have a pink Ethereum diamond as its logo, which distinguishes it from ETH.
Generate wETH via Uniswap
When using Uniswap, a user must first connect their wallet and make sure the Ethereum network is selected.
Then click on “Select Token” in the bottom box and select wETH from the list of options.
Now enter the amount of ETH to convert to wETH and click “Wrap”.
The transaction must then be confirmed by the user’s crypto wallet. At this time, gas fees must also be paid in ETH. Once all the details are in order and the transaction is confirmed by the user, all you have to do is wait for the transaction to be confirmed on the blockchain.
Generate WETH with MetaMask
When opening the MetaMask wallet, first make sure that the selected network is “Ethereum Mainnet”. Then click on “Swap”.
Then select wETH from the Swap to field.
Next, enter the amount of ETH to be traded. Then click Review Exchange.
A window with a quote of the exchange rate will appear. Since it is a matter of converting ETH to wETH, the rate should be 1:1. To complete the transaction, click on “Swap”.
How is Ether (ETH) unpacked?
Ether can also be extracted manually, e.g. B. by interacting with a smart contract. For example, ETH can be unwrapped in the same way it can be wrapped via the wETH smart contract on OpenSea. The only difference is that instead of “Wrap ETH” the user has to click “Unwrap wETH”.
The same goes for exchanging wETH back to ETH, which can be done using Uniswap or MetaMask. The process for unpacking is essentially the same as the ETH packing process above on both platforms. The only difference is that the values should be changed (from wETH to ETH).
What are the risks of using wrapped tokens?
Ethereum co-creator Vitalik Buterin has himself pointed out one of the main disadvantages of packaged assets. According to Buterin, the main problem with many of these packaged assets is their sensitivity to centralization.
Currently, asset wrapping is not Turing-complete and cannot be automated via the Ethereum blockchain. As discussed, the wrapping is usually only carried out via central programs, hence the concern about possible manipulation and misuse.
Wrapped tokens issued are dependent on the third-party platforms that issue them, inevitably centralizing decisions about wrapped assets. Buterin expressed concern about the possibility that such a mechanism would undermine the core principles of decentralization and transparency that the blockchain industry stands for.
Future of wrapped tokens
Currently, wrapped tokens allow blockchains to interact with each other. This allows for a much more decentralized ecosystem where tokens can be easily traded or exchanged between different platforms.
Better interoperability solutions are on the horizon, such as B. updating the code bases of blockchains to make them compatible with each other or using bridge chains. For Ethereum at least, the plan is to phase out the use of wrapped tokens like wETH alongside network developments.
This does not mean that wrapped tokens are going away any time soon. They will continue to play an important role and provide valuable services to those who need them. For one, wrapped tokens can serve as a stabilizing force between different blockchains as they help maintain consistent prices between them.
They can also help facilitate cross-chain atomic swaps, which are becoming increasingly popular. In the longer term, however, wrapped tokens will likely become less and less necessary as blockchains become more interoperable.
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