Ether (ETH) is the first and the native cryptocurrency of the Ethereum blockchain. It is used to offset gas fees when you deploy or interact with smart contracts on the network. Being the first currency on the network, it existed before the ERC-20 standard and hence does not conform with this standard. This is the rule that governs how you can design and deploy contracts on the Ethereum blockchain. These contracts are used to create tokens on the network. As a result, a contract written following the ERC-20 standard will not be compatible with ETH.

To deploy such a contract will require writing the code twice, one for ETH and one for other ERC-20 tokens. This, in a way, will result in complexity and unnecessary duplication of codes. To curb this problem, Wrapped Ethereum (WETH) is used in place of ETH. In other words, WETH is the ERC-20 version of ETH and serves as a bridge between ETH and other tokens on the Ethereum blockchain. Let’s understand how WETH works and why it is desired in the Decentralized Finance (DeFi) ecosystem.

What Is Wrapped Ethereum (WETH)?

Wrapped Ethereum (WETH) is an ERC-20 version of Ether (ETH). The value of WETH, just like any other wrapped token, is pegged to the value of the original coin and can be unwrapped at any point in time. The mechanism behind a wrapped coin is similar to that of stablecoins. Dollar (USD) pegged stablecoins such as tether can be exchanged for fiat USD at any point in time without extra charges. Hence, Tether can be said to be a wrapped USD.

WETH was created by 0x Labs in 2017. The goal was to account for the gap between ETH and other ERC-20 tokens. ETH is used to pay for gas fees on the Ethereum network but can’t be successfully integrated into the wide range of Decentralized Applications (DApps) built on the network since they were all programmed to work with ERC-20 standards. WETH was created to facilitate the use of ETH in DeFi DApps. To stake or add to a liquidity pool, WETH offers better functionality for these activities.

A wrapped coin is not an entirely new coin, but a representation of the original. What happens is simply the exchange of the original one for the wrapped version. In the case of WETH and ETH, you deposit your ETH and get WETH in return. At any point in time, you can return the wrapped one for the original. And when this happens, the WETH is burnt or destroyed. This is to ensure that for every WETH in circulation, there is an ETH in reserve.

Ether is not the only coin that can be wrapped. Almost all the major blockchains have a wrapped version of their native coin. Examples include: wrapped Bitcoin (WBTC), wrapped BNB (WBNB), wrapped AVAX (WAVAX), wrapped Fantom (WFTM), etc. All can be redeemed for the original coin at a 1:1 ratio, with no extra charges apart from transaction fees. We know that it is impossible to move a coin from one blockchain to another. But, wrapping such coins solves this problem. ETH can only be used on its native blockchain as opposed to WETH, which can be used on other blockchains.

How Does WETH Work? Wrapping Method

To wrap a coin, a custodian is required to hold the original and give you the wrapped version in return. The custodian can be a multi-signature wallet, a merchant, or a smart contract. If you want to wrap ETH, you send the quantity you wish to wrap to a smart contract where it is locked up and WETH is minted. Whenever you wish to redeem your ETH, the smart contract burns the WETH and gives you back the ETH. Decentralized Exchanges(DEXs) such as Uniswap, offer this functionality.

You can also swap ETH for WETH using a cryptocurrency wallet like Metamask. This wallet enables you to explore the Ethereum blockchain and interact with a wide array of DApps. Some Centralized exchanges (CEXs) also allow you to swap ether or other crypto assets for WETH.

How to Wrap Ethereum on Uniswap

1. Go to Uniswap. This site can be accessed from your web browser or the Metamask browser.

2. Select Ethereum as the network and connect your wallet.

3. Select ETH in the top box and WETH below.

4. Input the amount of ETH you wish to wrap.

5. Click on the wrap button and confirm the transaction via your wallet.

How to Unwrap Ethereum

To unwrap, simply follow the same procedures outlined above. But this time select WETH in the top field and ETH below. Click unwrap and confirm the transaction via your wallet. Once the order is executed, you will have your ETH right in your wallet.

Advantages of Wrapped Ethereum

One of the main purposes of creating WETH is to enable compatibility across the Ethereum blockchain. It is reasonable to ask why WETH when there is ETH already on the Ethereum blockchain. Remember that ETH existed before ERC-20 standard, hence it does not comply with this standard. As a result of this, it cannot be traded directly in the DeFi ecosystem with other ERC-20 tokens. Hence, DeFi applications configured on the Ethereum network works with ERC-20 tokens and not ether. So to be able to carry out activities such as staking and adding to a liquidity pool, etc., WETH is used. Also, WETH was created to avoid the complexity of creating multiple smart contracts to accommodate ether. This may result in smart contract bugs, loss of funds, and even an unfriendly user experience.

Wrapping a cryptocurrency brings about interoperability between blockchains. This is the ability of blockchains to interact and exchange value. A wrapped cryptocurrency can be used on a non-native blockchain WETH can be moved and used on other blockchains while enjoying lower transaction fees and faster transactions. For instance, ETH is automatically wrapped when transferred from Ethereum to Polygon. As a sidechain and a layer-two scaling solution of Ethereum, polygon offers its users cheaper transaction costs as compared to Ethereum.

Conclusion

WETH has not just been a useful tool for both developers and users of the Ethereum blockchain. For the developers, it has reduced the complexity of writing codes as well as limiting smart contract bugs. Traders, miners, liquidity providers, yield farmers, and other users of the network can access other blockchains and avoid the high gas fees normally encountered on Ethereum. In the near future, there might be more solutions to solve the compatibility issues between ETH and ERC-20 tokens.