Traders using the Ethereum network are familiar with the ERC-20 technical standard and have likely traded and invested in tokens that use it. After all, its practicality, transparency, and flexibility have made it the industry standard for Ethereum-based projects.
As such, many decentralized applications (DApps), crypto wallets, and exchanges natively support ERC-20 tokens. However, there is one problem: Ether (ETH) and ERC-20 do not follow exactly the same rules, since Ether was created long before ERC-20 was implemented as a technical standard.
So why does wrapped ETH matter? Simply put, ERC-20 tokens can only be traded with other ERC-20 tokens, not with Ether. In order to bridge this gap and allow the exchange of Ether for ERC-20 tokens (and vice versa), the Ethereum network introduced wrapped Ethereum (wETH). That said, wETH is the ERC-20 tradable version of ETH.
What is Wrapped Ether (wETH)?
As mentioned, wETH is the wrapped version of Ether, and is named so 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 wrapped Ethereum safe to trade and invest? The answer is yes, as far as Ethereum is concerned. wETH is pegged to the price of ETH in a 1:1 ratio, so they are basically the same. The only difference between wrapped tokens and their underlying assets is their use cases, especially for older currencies like Bitcoin (BTC) and Ether.
Wrapped tokens are like stablecoins, to some extent. On second thought, stablecoins can also be considered “USD wrapped” since they have the same value as their underlying asset, the US dollar. They can also be redeemed for fiat coins at any time.
Bitcoin also has a wrapped version called Wrapped Bitcoin, which has the same value as Bitcoin. The same goes for other blockchains like Fantom and Avalanche.
Wrapped Ethereum tokens can be unwrapped after they have been wrapped, and the process is simple: users just need to send their wETH tokens to a smart contract on the Ethereum network, which will return an amount equal to ‘ETH.
Wrapped tokens solve the interoperability problems that most blockchains have and allow easy exchange of one token for another. For example, users cannot normally use Ether on the Bitcoin blockchain or Avalanche on the Ethereum blockchain. Through wrapping, the underlying coins are tokenized and wrapped with certain blockchain token standards, thus allowing their use on this network.
How does wrapped Ethereum (wETH) work?
Unlike Ether, wETH cannot be used to pay gas fees on the network. However, since it supports ERC-20, it can be used to provide more opportunities for investment and participation in DApps. wETH can also be used on platforms like OpenSea to buy and sell through auctions.
Staking Ether tokens involves sending ETH to a smart contract. The smart contract will generate wETH in return. Meanwhile, ETH is locked to ensure that wETH is backed by a reserve.
Whenever wETH is exchanged for ETH, the exchanged wETH is burned or removed from circulation. This is done to ensure that wETH remains tied to the value of ETH at all times. wETH can also be acquired by trading other tokens on a crypto exchange such as SushiSwap or Uniswap.
So what’s the point of wrapped Ethereum? According to WETH.io, the ultimate goal is to update Ethereum’s codebase and make it ERC-20 compatible on its own, ultimately eliminating the need to wrap Ether for interoperability. But until then, wETH remains useful for providing liquidity to liquidity pools, as well as for crypto lending and NFT trading, among others.
In short, it’s not really a matter of ETH vs. wETH, since wrapping Ethereum is more of a workaround than a permanent solution. With the number of expected upgrades to the Ethereum network over the years, it seems like Ethereum is getting closer and closer to better interoperability.
How to wrap Ether (ETH)?
There are several ways to wrap Ether. As mentioned, one of the most common ways to do this is by sending ETH to a smart contract. Another method is to exchange wETH for another token using a crypto exchange.
Let’s look at three ways to generate wETH in the following sections:
Using the wETH smart contract on OpenSea
In this example, we will use the OpenSea platform to convert ETH to wETH using the wETH smart contract.
First, click on “Wallet”, located in the upper right corner of OpenSea. Next, click the three dots next to Ethereum and select “Wrap.”
Then enter the value of the amount of ETH you want to convert to wETH. Then click on “ETH Wrapper”. This will call the wETH smart contract to convert ETH to wETH.
A MetaMask popup will appear asking the user to sign the transaction.
A confirmation message will then appear once the wrapping is complete.
The converted wETH will appear in the wallet part of the user’s OpenSea account. The wETH will carry a pink Ethereum diamond as its logo, which will distinguish it from ETH.
Generating 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” located in the bottom field and select wETH from the list of options.
Now, enter the amount of ETH you want to convert to wETH and click “Wrap”.
The transaction will then need to be confirmed from the user’s crypto wallet. Gas fees in ETH will also need to be paid at this stage. Once all the details are in order and the transaction has been confirmed from the user’s end, it’s just a matter of waiting for the transaction to be confirmed on the blockchain.
Generating wETH with MetaMask
When opening the MetaMask wallet, start by making sure the selected network is “Ethereum Mainnet”. Then click “Change”.
Then select wETH in the “Switch to” field.
Then enter the amount of ETH you want to exchange. Then click “Review Exchange”.
A window will appear with a conversion rate quote. Since it involves the conversion of ETH to wETH, the rate should be 1:1. To complete the transaction, click “Change”.
How to unwrap Ether (ETH)?
Unwrapping Ether can also be done manually, such as by interacting with a smart contract. For example, ETH can also be unwrapped in the same way as it can be wrapped using the wETH smart contract on OpenSea. The only difference is that instead of clicking “Wrap ETH”, the user has to click “Unwrap wETH”.
The same goes for the exchange of wETH to ETH, which can be done via Uniswap or MetaMask. The process for unwrapping is essentially the same as the process described above for wrapping ETH on both platforms. The only difference is that the values have to be changed (from wETH to ETH).
What are the risks of using wrapped chips?
Ethereum co-creator Vitalik Buterin himself pointed out one of the main disadvantages of wrapped assets. According to Buterin, the main problem with many of these wrapped assets is their sensitivity to centralization.
Currently, packaging assets are not Turing complete and cannot be automated using the Ethereum blockchain. As discussed, wrapping is only done through central programs, hence the concern for possible manipulation and abuse.
Issued wrapped tokens are dependent on the third-party platforms that issue them, inevitably subjecting decisions regarding wrapped assets to central entities. Buterin expressed their concerns about the possibility that this mechanism undermines the basic principles of decentralization and transparency that the blockchain industry stands for.
Future of wrapped chips
Currently, wrapped tokens make it possible for blockchains to interact with each other. This allows for a much more decentralized ecosystem, where tokens can be easily exchanged or swapped between different platforms.
Better interoperability solutions are on the horizon, such as updating blockchain codebases to be compatible with each other or using bridging chains. For Ethereum at least, the plan is to phase out the use of wrapped tokens like wETH along with network developments.
That doesn’t mean wrapped chips are going away anytime soon. They will continue to play an important role, providing a valuable service to those who need it. On the one hand, wrapped tokens can serve as a stabilizing force between different blockchains, helping to keep prices consistent between them.
They can also help facilitate cross-chain atomic exchanges, which are becoming increasingly popular. In the long run, however, wrapped tokens will likely become less and less necessary as blockchains become more interoperable.
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