Wrapped Ether (WETH): Concept and Packaging

Wrapped Ether (ETH) is a token pegged to Ether (ETH). Wrapped Ether is available for many platforms and DApps that support ERC-20 tokens. While Ether can be used to pay network transaction fees, its functionality is different from ERC-20 tokens.

You can easily convert Ether to Wrapped Ether through the wrapping process. You can also exchange Wrapped Ether back into Ether at any time. Both wrapping and unwrapping follow a 1:1 ratio, i.e. there are no additional fees other than transaction fees.

By interacting with the wrapping ether smart contract, you can wrap your ether manually, and the smart contract will store your ether and return an equal amount of wrapped ether.

Ethereum’s decentralized finance (DeFi) ecosystem is quite large, and the use of wrapped ether provides more opportunities for staking investments. There are many versions of wrapped ether, but some are more popular than others. You can even find wrapped ether on other blockchains that can be used in their ecosystem. Mainstream uses of wrapped ether include NFT transactions, injecting liquidity into liquidity pools, and cryptocurrency lending.

With Ethereum, most of the tokens you trade and invest in are likely to use the ERC-20 token standard. Adopting this technical standard has become a mainstream choice for decentralized applications, wallets, and projects as it provides utility for most users. However, this status quo creates problems for Ethereum’s native token, ether.

Ether does not follow the same rules as ERC-20 tokens, but also has usage in ERC-20 decentralized applications. That's how Wrapped Ether came into being, which you probably already know about. Let’s see why it is a utility for many projects, DApp investors and holders.

What is Wrapped Ether (WETH)?

Wrapped Ether is an ERC-20 token on Ethereum that is pegged to the price of Ether (ETH). While ether, ethereum's native token, can be used to pay for gas, wrapped ether cannot. However, wrapped ether is more widely used than ether and is quite popular in the decentralized finance (DeFi) ecosystem. MetaMask, TrustWallet, and almost all wallets on the Ethereum network will support wrapping ether. Let's explore some of its uses.

Why do we need to wrap ether?

At first, there was a bit of confusion: why tokens like wrapped ether exist. Doesn't the Ethereum blockchain already have ether? The first thing to understand is that not every token on Ethereum is technically alike. The network allows developers to create new rules and standards for cryptocurrencies.

An example is the ERC-721 form, which gives us non-fungible tokens (NFTs). These are very different from ether or ERC-20 tokens. Developers have a lot of room for customization when creating these digital assets. So, while ether can be used to pay for gas on Ethereum, ether cannot be used in all decentralized applications.

Today, most DeFi DApps accept ERC-20 tokens for investment and staking. If you want to inject ETH into liquidity pools or use it as collateral, it will be much easier to use in the ERC-20 version. This provides maximum compatibility across the blockchain and saves time developing new smart contracts.

How to wrap Ether (ETH)?

The process of generating wrapped ether is simple - send ether to a smart contract, and get wrapped ether in return. That is, all created wrapped ether is fully backed by the ether reserve. Your ether is locked in a smart contract and can be exchanged back for wrapped ether at any time. When your ether is returned, the contract destroys the provided wrapped ether.

To wrap ETH, you can directly interact with the wrapped ETH smart contract and your ETH will be credited to the wallet at a 1:1 ratio to the wrapped ETH (you still pay transaction fees). Switching back requires interacting with another smart contract, but the process is pretty much the same.

However, it is much easier to exchange another coin for wrapped ether through a cryptocurrency exchange. Swap ether for wrapped ether using the Uniswap DEX or directly through the Metamask wallet.

How to wrap ether (WETH)?

As mentioned earlier, you can manually unwrap ether by interacting with the smart contract. However, it is simpler and safer to exchange wrapped ether for ether. Uniswap or MetaMask instructions to do so, but make sure you are switching from wrapping ether to ether. You can also wrap ether through Binance Convert.

Can ether be wrapped on other blockchains?

Other wrapped versions of ether exist on mainstream blockchains, which increase ethereum's interoperability. For example, using Wrapped Ether on Binance Binance Smart Chain (BSC) allows you to trade or use Wrapped Ether in the Binance Smart Chain (BSC) decentralized finance ecosystem. To do this, you need to withdraw your ether from Binance or other exchanges into your Binance Smart Chain (BSC) wallet. Before withdrawing, please make sure that your trading platform supports converting from Ether to Wrapped Ether.

You can also use bridge services. These are third-party DApps that take cryptocurrency and store it on the original blockchain, then mint the wrapped token on the target blockchain at a 1:1 ratio.

Bridge tokens generally work well, but be aware that transferring tokens across blockchains can be risky. In some cases, partial bridging can compromise smart contracts. If you want to bridge wrap bitcoin, wrap ether, or other tokens, please study the platform you use carefully before using the bridge service.

How does the price of wrapped ether align with the price of ether?

The key to maintaining a peg between packaged ether and ether is that it can be exchanged 1:1. If wrapped ether is cheaper, people will buy it and exchange it for more expensive ether for a profit. This will increase the demand for wrapping ether, thereby increasing the price. If wrapped ether is more expensive, people will buy ether and exchange it for wrapped ether to sell, increasing the supply of wrapped ether and lowering its price. These supply and demand principles ensure that the peg remains relatively stable.

In which DeFi DApps can wrapped ether be used?

Ethereum has many DeFi DApps that accept ERC-20 tokens to explore. One option is to inject wrapped ether into liquidity pools for use on decentralized exchanges (DEXs) such as Uniswap. Once liquidity is provided, you can start earning fees from users who use the pool to exchange tokens. However, impermanent loss is always a possible risk that may result in a reduction in the number of tokens you deposit. Using a pool of funds with greater liquidity will reduce this risk.

You can also lend your wrapped ether on platforms like Aave. Other users can borrow your tokens, but must first provide collateral to back the loan. In return, you will earn interest until you decide to withdraw your deposit.

In conclusion

Ethereum has one of the oldest and most mature decentralized application ecosystems. This makes wrapping ether a necessity, as many ether holders want to use ether in DeFi projects. If you decide to start experimenting with wrapping ether, we recommend that you buy in ether or other tokens, which are simpler and more convenient than interacting with wrapping smart contracts.