What Is Wrapped Ether (wETH) And How does It Work?

What Is Wrapped Ether (wETH) And How does It Work?

Ethereum News
January 9, 2023 by Diana Ambolis
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The ERC-20 technical standard is well-known to traders on the Ethereum network, and they have almost certainly bought and purchased ERC-20 compliant tokens. After all, it has become the industry standard for Ethereum-based projects because of its usefulness, openness, and adaptability. One issue is that Ether (ETH) was developed far earlier than ERC-20 was adopted
What Is Wrapped Ether (wETH) And How does It Work?

The ERC-20 technical standard is well-known to traders on the Ethereum network, and they have almost certainly bought and purchased ERC-20 compliant tokens. After all, it has become the industry standard for Ethereum-based projects because of its usefulness, openness, and adaptability.

One issue is that Ether (ETH) was developed far earlier than ERC-20 was adopted as a technical standard. As a result, ERC-20 tokens are natively supported by many decentralized apps (DApps), crypto wallets, and exchanges. Thus they do not exactly adhere to the same set of guidelines.

Why is wrapped ETH important, then? In other words, ether cannot be traded with ERC-20 tokens; only ERC-20 tokens may. The Ethereum network created wrapped Ethereum to fill this gap and enable the exchange of Ether for ERC-20 tokens (and vice versa). wETH, however, is ETH’s tradeable ERC-20 variant.

Wrapped Ether (wETH) – what is it?

Since wETH is effectively Ether “wrapped” with ERC-20 token specifications, it is known as the wrapped form of Ether (wETH), as was already mentioned. Coins and tokens that have been wrapped practically have the same value as their underlying goods.

So, is it safe to trade and invest in wrapped Ethereum? In terms of Ethereum, the answer is indeed yes. Since wETH and ETH are priced at a 1:1 ratio, they are essentially equal. With older coins like Bitcoin (BTC) and Ether, the sole distinction between wrapped tokens and their underlying assets is in the use cases.

Wrapped tokens resemble stablecoins in certain ways. Since stablecoins have the same value as their underlying asset, the US dollar, they might alternatively be referred to as “wrapped USD.” They can also always be exchanged for fiat money.

Wrapped Bitcoin is a kind of Bitcoin that has the same value as Bitcoin. For other blockchains like Fantom and Avalanche, the same holds. The procedure of unwrapping wrapped Ethereum tokens is straightforward: users transfer their wETH tokens to a smart contract on the Ethereum network, which will return an equal amount of ETH.

Wrapped tokens address interoperability problems that most blockchains experience and simplify token exchange. By wrapping, underlying coins are tokenized and conform to the token specifications of a certain blockchain, enabling their use on that network. Users cannot often use Avalanche or Ether on the Ethereum network or the Bitcoin blockchain.

The operation of wrapped Ethereum (wETH).

Unlike Ether, wETH cannot be utilized to cover network gas costs. However, because it is ERC-20 compatible, it can be utilized to increase the number of staking and investment options on DApps. wETH can also be used to buy and sell through auctions on websites like OpenSea.

Sending ETH to a smart contract is necessary to wrap Ether tokens. In return, the smart contract will produce wETH. To guarantee that the wETH is supported by a reserve, ETH is locked in the interim.

Additionally, wETH can be obtained by exchanging other tokens on a cryptocurrency exchange like SushiSwap or Uniswap. The exchanged wETH is destroyed or removed from circulation whenever it is converted back into ETH. This is done to ensure that wETH is always linked to the price of ETH.

So what purpose does wrapped Ethereum serve? The ultimate objective, according to WETH.io, is to upgrade Ethereum’s software and make it ERC-20 compliant on its own, eventually doing away with the need to wrap Ether for interoperability. But until then, wETH remains valuable for various purposes, including NFT trading, lending out cryptocurrency, and providing liquidity to liquidity pools.

In other words, wrapping Ethereum is more of a workaround than a long-term fix. Thus it’s not a question of ETH vs. wETH. The number of network updates planned over the years suggests that Ethereum is getting closer to improved daily interoperability.

Also Read: Why Hackers Are Always Hitting Blockchain Bridges

How is Ether (ETH) opened up?

It is also possible to manually unwrap ether, for example, by engaging with a smart contract. For instance, the wETH smart contract on OpenSea can be used to wrap and unwrap ETH similarly. The user must select “Unwrap wETH” rather than “Wrap ETH,” which is the sole change.

The same applies when switching from wETH to ETH using Uniswap or MetaMask. The procedure for unwrapping ETH on both platforms is essentially the same as wrapping it above. The values should be changed as the sole difference (from wETH to ETH).

Also, read – 7 Tips For Growing Your Career In The NFT Industry

What dangers come with the use of wrapped tokens?

Vitalik Buterin, a co-creator of Ethereum, identified one of the primary drawbacks of wrapped assets. Buterin claims that many of these wrapped assets’ major issue is their vulnerability to centralization.

Since they are not Turing-complete, wrapping assets cannot be automated on the Ethereum blockchain. As was previously said, wrapping is typically exclusively performed via central programs, raising concerns about potential abuse and manipulation.

Wrapped tokens that have already been issued rely on the third-party platforms that issued them, making decisions over wrapped assets necessarily susceptible to centralized bodies. Buterin expressed his worries that such a method might compromise the fundamental values of decentralization and transparency that the blockchain sector upholds.

Prospects for wrapped tokens

At the moment, wrapped tokens allow blockchains to communicate with one another. As a result, an considerably more decentralized environment is made possible, enabling simple trading or platform-to-platform exchange of tokens.

Better interoperability options are in the future, such as using bridge chains or updating the codebases of blockchains to be compatible with one another. The idea is to progressively phase out wrapped tokens like wETH with network upgrades, at least for Ethereum.

Wrapped ether tokens won’t be obsolete anytime soon. They will continue to play a crucial role in helping those in need and rendering useful services. Wrapped tokens, for instance, can act as a stabilizing force between several blockchains by assisting in maintaining constant prices between them. This only means.

They can also aid in the advancement of increasingly widespread cross-chain atomic exchanges. However, as blockchains grow more interoperable over time, wrapped tokens will probably become less and less required.