What is WETH? Wrapped ETH Explained
Key Takeaways
- Wrapped Ether (WETH) bridges Ethereum’s native cryptocurrency (ETH) with the ERC20 token standard, enabling seamless use in decentralized finance.
- WETH enhances interoperability by allowing ETH to interact with other ERC20 tokens and decentralized applications, unlocking DeFi’s full potential.
- Users can easily convert ETH to WETH and back using decentralized tools like Uniswap or MetaMask, ensuring a 1:1 value while simplifying transactions.
- WETH’s creation through smart contracts ensures transparency and collateralization, making it an indispensable tool in Ethereum’s growing DeFi ecosystem.
Decentralized finance is one of the most innovative and thriving areas in the cryptocurrency space. It offers a variety of different platforms for trading, borrowing, lending, and liquidity provision. As a result, DeFi has created a dynamic ecosystem largely powered by the ERC20 token standard.
This standard ensures compatibility among the many decentralized applications (dApps) operating on Ethereum. However, every Ethereum-based transaction incurs a fee, often referred to as a “gas fee,”. That’s where wrapped Ether (WETH) comes into play.
In this article, we’ll explore what WETH is, why it’s essential for DeFi, how it compares to ETH, and how you can seamlessly convert between the two digital assets.
What is WETH (wrapped Ether)?
WETH, or Wrapped Ether, is a tokenized version of ETH (Ether). It’s lifeblood of the DeFi and Web3 ecosystems, serving as the primary currency for paying gas fees on different protocols.
So why do we need WETH instead of simply using ETH?
While ETH is the backbone of the Ethereum blockchain, it does not conform to the ERC20 standard, which is the basis of DeFi protocols. Ether is a coin, while WETH is a token, with each one speaking its own “language”.
Since ETH doesn’t use the ERC20 token standard, it can’t be used on DeFi protocols. Wrapped Ether was created to solve this limitation, making ETH compatible with ERC20 and enabling it to be used across DeFi platforms.
How does Wrapped Ether Work?
Wrapped Ether is essentially ETH that has been “wrapped” with a smart contract conforming to the ERC20 standard. This creates a synthetic token that can be used in a variety of DeFi applications such as trading, lending, borrowing, staking, and providing liquidity.
One of the most crucial aspects of WETH is that it maintains a 1:1 value with ETH. This ensures users can convert between the two seamlessly, without any loss of value. Furthermore, this makes WETH a vital tool for DeFi enthusiasts looking to maximize their opportunities within the ecosystem.
ETH vs WETH – A Comparison
While ETH and WETH are closely related, there are some key differences to understand. Here’s a side-by-side comparison:
| Aspect | ETH (Ether) | WETH (Wrapped Ether) |
|---|---|---|
| Standard | Native currency | ERC-20 token |
| Compatibility | Non-compliant with ERC-20 | Fully compliant with ERC-20 |
| Use Case | Paying gas fees, transferring value, staking, governance | DeFi operations (trading, lending, borrowing, liquidity provision) |
| Conversion | Directly minted via staking | Created by wrapping existing ETH |
| Redeemability | Cannot be converted into another token directly | Always redeemable 1:1 with ETH |
Both ETH and WETH serve unique purposes. ETH is essential for paying transaction fees but WETH unlocks the potential of DeFi. It achieves this by making Ethereum’s native currency compatible with the necessary token standard.
Why Do We Need WETH?
The need for WETH arises from the inherent limitations of ETH as a non-ERC20 token. Here are the primary reasons WETH is indispensable in the DeFi ecosystem:
1. ERC20 Compatibility
Most decentralized applications follow the ERC-20 token standard, but ETH predates the release of that standard. As a result, ETH, in its native form, is incompatible with these platforms.
One solution around this would be for each dApp to incorporate custom software to allow for the trading of ETH. However, this means extra work and development time. WETH makes things much easier. Instead of dApps making custom frameworks for ETH, users can just use WETH (which follows the ERC-20 standard).
2. Simplifying Transactions
Many DeFi activities, such as token swaps, liquidity provision, and yield farming, require a standardized token format. WETH provides this standardization, enabling efficient and frictionless transactions across various platforms.
3. Interoperability
WETH acts as a bridge, allowing ETH to interact with other ERC20 tokens and decentralized applications without any technical barriers. This also means that users can transfer WETH to other blockchains different than Ethereum that support the ERC20 standard. As a result, Ethereum’s native token finds more use cases on many other networks.
4. Liquidity Provision
Decentralized exchanges (DEXs) like Uniswap often pair WETH with other tokens in liquidity pools. In addition, this enhances market efficiency and ensures users can trade ETH without limitations.
How Is WETH Created?
The process of creating WETH involves wrapping ETH using a specialized smart contract. It’s easy to do and anyone is free to wrap ETH to create WETH.
The ETH used to mint WETH is stored as collateral in the smart contract, meaning every WETH token is backed 1:1 by an equivalent amount of ETH.
Once the ETH is wrapped, the resulting wrapped ETH tokens can be used across any platform or application that supports ERC20 tokens.
How To Convert Ethereum to Wrapped ETH
Converting ETH to WETH is a straightforward process that users can do on most decentralized platforms. Here’s a step-by-step guide:
- Create a Wallet: To interact with blockchain applications, you’ll first need to create a crypto wallet.
- Acquire ETH: The next step is to add ETH to your wallet. If this is your first time, you can get some ETH on a centralized exchange.
- Choose a Platform: Visit a platform like Uniswap or any other application that supports wrapping ETH.
- Connect Your Wallet: Pick from the list of supported wallets and connect yours.
- Select “Wrap ETH”: Locate the option to wrap ETH on the platform’s interface.
- Enter the Amount: Specify the amount of ETH you want to wrap into WETH.
- Deposit ETH: Send ETH to a smart contract designed to wrap it. This smart contract holds the ETH securely as collateral.
- Approve the Transaction: Confirm the transaction in your crypto wallet. You’ll need to pay a small gas fee to complete the process.
- Mint WETH: The smart contract mints an equivalent amount of WETH tokens in exchange for the ETH deposited. For example, depositing 5 ETH will result in the creation of 5 WETH.
- Receive WETH: Once the transaction is confirmed, your WETH will appear in your wallet balance.
How To Unwrap WETH – Converting Back to Ether
Converting wrapped Ether back to ETH is simple. Let’s assume you already have a wallet and some WETH in it, here’s how you can convert it back into ETH:
- Choose a Platform: Visit a platform that supports unwrapping ETH.
- Connect Wallet: Connect your wallet to the platform.
- Select “Unwrap WETH”: Locate the option to unwrap WETH into ETH on the platform’s interface.
- Enter the Amount: Specify the amount of WETH you want to unwrap into ETH.
- Deposit WETH: Send WETH to the smart contract designed to unwrap it.
- Approve the Transaction: Confirm the transaction in your wallet. You’ll have to pay a small gas fee to complete the process.
- Receive ETH: Once the transaction is complete, your ETH will appear in your wallet balance.
Closing Thoughts
Wrapped Ether is more than just a technical workaround it’s a fundamental tool that powers the DeFi ecosystem. By bridging the gap between Ethereum’s native cryptocurrency and the ERC20 token standard, wrapped ETH has unlocked a world of opportunities for DeFi enthusiasts.
Whether you’re trading, providing liquidity, or exploring decentralized applications, understanding WETH and its utility is essential for navigating Ethereum’s dynamic ecosystem. So, the next time you venture into DeFi, remember that WETH is your gateway to unlocking the full potential of Ethereum.
