The ERC 20 standard governs how tokens are transferred and keeps a record of these transactions within the Ethereum Network. Wrapped tokens are a type of cryptocurrency that has been converted from its original form to fit a specific blockchain’s technical standards. The most common use case for wrapped tokens is to enable the usage of assets like ETH and BTC in DeFi protocols that only support ERC-20 tokens.
Wrapping involves sending Ethereum to a smart contract that provides WETH in return. Both parties lock a set amount of ETH in a smart contract that governs their wager on the blockchain. weth token If the temperature in London exceeds 80 degrees on the agreed-upon date, the smart contract automatically executes, sending ETH to the winning party’s crypto wallet.
- Both tokens are widely used on the Ethereum blockchain and other blockchain networks.
- You can convert Ether (ETH) to Wrapped Ethereum (WETH) or the other way around.
- With that said, steps are being taken to upgrade the Ethereum codebase to make it conform to ERC-20 standards — essentially making WETH a thing of the past.
- Another way to think of wrapped tokens is by looking at stablecoins.
- After unwrapping (a.k.a. burning) it, you get the original ETH back.
Besides transaction fees, there are no additional costs involved. Ethereum, the blockchain platform, has its native token known as ETH. This digital currency serves as the lifeblood of the Ethereum network, enabling users to conduct transactions and pay gas fees. However, while ETH is a fundamental component https://cryptolisting.org/ of Ethereum, it has certain limitations regarding DeFi applications. The mechanism is quite similar to how stablecoins would work given that the centralized entity is minting and burning native and non-native assets respectively. The idea, however, is quite similar so it is very easy to get confused.
You can even find wrapped ETH on other blockchains to use in their ecosystems. Popular uses for WETH include NFTs trading, providing liquidity to liquidity pools, and crypto lending. Another way to think of wrapped tokens is by looking at stablecoins.
WETH (Wrapped ETH)
Your ETH is locked in the smart contract and can be exchanged back at any time for WETH. When your ETH is returned, the contract burns the supplied WETH. One example would be the ERC-721 format that gives us Non-Fungible Tokens (NFTs). Developers have a lot of room for customization when creating these digital assets. So while ETH can be used to pay for gas fees on Ethereum, ETH can’t be used in every DApp.
However, this fact has presented a problem for Ethereum’s native coin, Ether. Ethereum’s DeFi ecosystem is large, and using WETH provides more opportunities for staking and investing. There are many versions of WETH, but some are more popular than others.
Wrapped tokens can be bought directly, or a merchant can convert their existing cryptocurrency and wrap it. The merchant, in this case, would send the person’s crypto to a custodian. Having the ability to port over native assets from one network to the other is certainly helpful when users don’t want to sell their assets to buy separate ones. Just think about someone who has extensive reserves of Bitcoin. To use that on Ethereum, they would first need to sell their BTC for USDT to be able to use it.
What are wrapped tokens?
For cryptocurrencies, a “wrapped” token is nothing but an empty vessel that contains the original asset. The process of wrapping helps use a non-native asset on any blockchain. Additionally, WETH can be used as collateral in DeFi lending platforms like Aave and Compound to borrow other tokens or earn interest on the WETH itself. Overall, WETH plays a critical role in the Ethereum DeFi ecosystem by providing liquidity and enabling the seamless exchange of assets.
A cryptocurrency that’s built on top of one blockchain network to be used on a different blockchain needs to be wrapped. ETH can be wrapped manually by interacting with the WETH smart contract. WETH can also be created using decentralized exchanges (DEXs) such as Uniswap. Since most blockchains are silos in themselves, they do not offer fluid interoperability or the ability to transfer native tokens from one blockchain to another. As you can imagine, this would be frustrating for the holders of one specific type of cryptocurrency. In a nutshell, there is no difference between ETH and WETH because the latter is simply a “wrapped” version of the former.
Can you convert Wrapped ETH to ETH?
One of the most crucial aspects of an ERC-20 token is that it is fungible, which means that one token will always be exchangeable for another one of the same value. In addition, the reliance on a custodian to mint and burn tokens leads to centralization. This centralization can be problematic and contradicts the point of a decentralized currency. For example, there could be US$3 billion of WETH on the Ethereum blockchain, but it could all be held/controlled by one company.
Think of stablecoins as a wrapped version of U.S. dollars or other fiat currencies. They allow U.S. dollars to be used on various blockchains rather than strictly within the fiat world we transact in every day. There are wrapped tokens on other blockchains, such as Wrapped Bitcoin (WBTC). And ETH can be wrapped for use on different blockchains beyond Ethereum, helping to increase liquidity, capital efficiency and interoperability. ETH is the coin, and the wrapped version of the coin becomes the WETH token. Due to this, it can be used for yield farming, lending, and used for providing liquidity to a variety of liquidity pools.
These tokens often must be wrapped first, paving the way for frictionless exchanges on DEX platforms. This website is using a security service to protect itself from online attacks. The action you just performed triggered the security solution. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. Note that the Coinbase wallet supports the Ethereum network and “all ERC-20” tokens, which means that you will be able to easily add your WETH to the wallet.
After providing liquidity, you’ll begin to earn fees from users who swap their tokens using the pool. However, impermanent loss is always a possible risk that can lead to a decrease in the number of your deposited tokens. Using a pool with larger amounts of liquidity will reduce this risk. As mentioned before, you can unwrap Ether manually by interacting with a smart contract. To do this, follow our previous Uniswap or MetaMask instructions, but make sure you are changing from WETH to ETH.
To understand the wrapping and unwrapping mechanism, consider our example of a smart contract bet on the temperature in London next year. Until the day in question, the parties to the contract lock up ETH in the smart contract—and the coins are automatically released to whoever wins the bet. Wrapped Ethereum (WETH) is essentially an ERC-20 token standard-compliant cryptocurrency that is pegged to the value of Ether (ETH). Ethereum’s native token, ETH, is used for paying gas fees on the network. Decentralized Finance (DeFi) use cases and decentralized applications dApps support specific standards. If the coin or token in question is not supported by the blockchain, it needs to be wrapped.
Facilitating DEXs
But why would we ever need a wrapped version of Ethereum to use on Ethereum’s blockchain? In this article, we’ll explore what necessitated the creation of WETH. If you have ETH, you can wrap it and get ETH by simply trading ETH to WETH. Note that Binance does not allow you to swap ETH for WETH using this method. Now that we understand the basics of wrapping ETH, we can now go over how to unwrap WETH.
