Understanding wrapped ETH（wETH）

2022-03-29, 03:12

Many ethereum-based decentralized applications and platforms use wETH instead of ETH.

wETH is a form of tokenized ETH.

Wrapped tokens increase interoperability and lower trading fees.

Unwrapping is the process of converting the tokenized version of a cryptocurrency to the underlying asset.

ETH is the mainstream cryptocurrency which exists on the ethereum blockchain. However, there are other types of tokens on the ethereum network which include ERC20 and ERC721. As we already know, ERC20 tokens are fungible while the ERC721 are non-fungible tokens. For now, we want to focus on a special ERC20 token called wrapped ETH or wETH.

What is wETH?

As you have already read above, wETH is an ERC20 token which is pegged at a ratio of 1.1 with ETH. The mechanism of wETH is similar to that of stablecoins whose values depend on the prices of the underlying assets.

wEth is not the first wrapped token which we know. There are several wrapped tokens which exist on various blockchains. For example, there is wrapped bitcoin (wBTC) which is a cryptocurrency pegged against bitcoin. As a fact the major blockchains have wrapped tokens, including Wrapped BNB, Wrapped AVAX, or Wrapped Fantom.

The process of converting ETH into wETH is called wrapping. However, the interesting fact is that people can redeem the wrapped tokens for the original cryptocurrency. This means that you can easily convert wETH into ETH whenever you want. The process of converting wETH into ETH is referred to as unwrapping.

People use wETH in various dApps and platforms which support ERC20 tokens. Significantly, ETH does not perform the same function as ERC20 tokens in these dApps and platforms. Instead, ETH is used as gas or transaction fee. When wrapping ETH or unwrapping wETH there is no additional cost except the gas fee.

Why is wETH unique?

First, wrapped tokens such as wETH allow tokens to exist on other blockchains. For example, wrapped ETH can exist on multiple chains including Avalanche. As such, people who invest in wETH get exposure to ETH without owning it. Therefore, the main purpose of wETH is to enable easy exchange of ETH to other various ERC20 tokens.

The ERC20 standard, which has standardized rules for tokens created on the ethereum blockchain, was developed in 2015. These rules make the tokens launched on ethereum network similar, thereby able to perform the same functionalities on dApps and ethereum-based platforms. More specifically, the rules which all the ERC20 tokens should comply with include total Supply, balanceOf, transfer, transferFrom, approve and allowance.

Surprisingly, ETH does not follow these standardized rules. Instead, wETH takes its place where dApps and ethereum based platforms functionalities require ERC20 tokens. Thus, basically, wrapped ETH was developed in order to increase interoperability as it exists on many blockchains.

Wrapped ETH results in many investment opportunities since many dApps and wallets accept wETH. For instance, many dApps allow people to stake wETH but not ETH. Also, it is much easier for people to use wETH instead of ETH to add liquidity or as collateral. Therefore wETH is widely used in NFT trading, liquidity provision and crypto lending.

The other benefit of wETH is that it results in lower transaction fees than when using ETH. For instance, when people convert wETH directly to other ERC20 tokens in DEXs the gas fee is relatively low.

Wrapped tokens also make trading very simple. This is because you can quickly and easily convert wrapped tokens to other cryptocurrencies in decentralized exchanges or on some DeFi applications.

How to wrap ETHER

The process of wrapping ETH requires custodians who hold the collateral. When a person wraps ETH, the custodian will hold ETH, which is the underlying asset and gives him/her wrapped ETH. In this case, merchants, multi-signature wallets, or just a smart contract can be the custodian of ETH.

Wrapped Tokens

In general, wrapped tokens exist on many exchanges and DeFi applications, making transactions and investment very convenient. Yes, we find some wrapped tokens on centralized exchanges as well.

For example, on Gate.io you get the wrapped BTC, which you can convert to other cryptocurrencies. People can buy or sell wBTC at Gate.io in the Spot Trading section. You simply trade them in the same way as any other tokens. With Gate.io, the orders are fulfilled quickly, prompting you to get your cryptocurrency in near instant manner.

Basically, at Gate.io, the wrapped BTC trade against the BTC and USDT. However, in the spot trading section you find many trading pairs involving major tokens and coins such as ETH, SOLANA, BNB, XRP, LUNA and ADA, among others.

Conclusion

The main advantage of wrapped tokens is that they exist on many different blockchains and they make trading very simple. Apart from resulting in lower trading fees, wrapped tokens open up many investment opportunities such as buying and selling of NFTs. There are many wrapped tokens which include Wrapped BNB, Wrapped AVAX and Wrapped Fantom.

Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement