A Beginner’s Guide To Wrapped Ethereum (wETH)
Ethereum is normally considered as a computing platform that is distributed. It is a large platform where the decentralized apps can be built by the developers. These applications help then in performing almost every function that could be done by a traditional program in a computer.
ERC-20 technical standards are a normal practice among the traders who have a thorough familiarity with the Ethereum network. They normally utilize and trade the tokens that utilize Ethereum. Being flexible, transparent, and practical has increased its utility in the financial market and has made it more popular among the traders.
The ERC-20 tokens are locally supported by a number of exchanges, wallets, and decentralized applications. As the creation of Ether happened a long way before the implementation of ERC-20 as technical standard, the only main issue that lies is that both Ether and ERC-20 do not follow similar regulations and rules.
Therefore, wrapped Ethereum (wETH) was introduced by the Ethereum network in order to fulfill the gap between the two and to permit the exchange of ERC-20 tokens for Ether and vice versa. This can be said that now the tradable version of Ethereum with ERC-20 is wrapped Ethereum as before one can only trade ERC-20 tokens with ERC-20 tokens.
Here is a detailed guide that explains the utilization and working of wrapped Ethereum over the Ethereum blockchain network. Moreover, it will also explain the readers about the risks and benefits attached to dealing with ERC-20.
What is wETH or Wrapped Ethereum?
As the name indicates, the wrapped version of the traditional Ethereum is known as wrapped Ethereum (wETH). When Ether is actually wrapped in the standards of ERC-20 tokens, it forms wrapped Ethereum (wETH).
The traders consider the wrapped Ethereum safer and easier for investment and trade. The wrapped Ethereum (wETH) is usually pegged in ratio of 1:1 with the price of ETH in the market. This ratio equalizes the balance between the two making them similar. The applications of both are only where both the wrapped Ethereum and assets underlying it differ with each other. This is relatively true when we talk about the old ones such as Ether or Bitcoin.
It can also be said that to some extent, the wrapped tokens behave in the same way as the stablecoins. As the stablecoins also have the same price as the United States Dollars, their underlying assets, one can also refer the stablecoins as wrapped USD. One can exchange them for the traditional currencies at any time of need.
A wrapped version of Bitcoin called as wrapped Bitcoin also exist that is similar in value to traditional Bitcoin. Many other blockchains like Avalanche and Fantom also behave in the same manner.
It is a very simple process to unwrap the wrapped Ethereum tokens once they are wrapped. The smart contracts that exist on the Ethereum network receives the wrapped Ethereum (wETH) tokens by the users and then simply return to them an equal amount of Ethereum.
Ethereum vs. Wrapped Ethereum (wETH)
When in order to generate wrapped Ethereum (wETH), Ethereum is sent to the smart contract, before providing the equivalent amount of wETH, the ETH is locked up by the contract. One can only get the access to the ETH that has been locked by the contract when he reverses the transaction process by the method of unwrapping and providing an equal amount of wETH.
One can think that wrapped Ethereum (wETH) has been evolved from the ETH and it allows the users to carry out more advanced functions in the crypto ecosystems.
Working of Wrapped Ethereum (wETH)
Being compatible with ERC-20, the gas fee of the network cannot be paid by using wrapped Ethereum (wETH) unlike Ether where one can pay the gas fee. However, using the wrapped Ethereum, one can get multiple opportunities on the decentralized apps related to staking and investment. On the platforms like OpenSea, auctions can be sold and purchased by using the wrapped Ethereum (wETH).
Ether is sent to the smart contracts when the tokens are actually wrapped. As a result, wrapped Ethereum (wETH) is generated by the smart contract. In order to make sure that a reserve is backing up the wrapped Ethereum (wETH), ETH is locked for a certain period of time.
The wETH is burnt or eliminated from the cycle being circulated whenever the wrapped Ethereum is then exchanged with the ETH again. This practice makes sure the pegging of wrapped Ethereum (wETH) with the market worth of ETH continuously. Over any crypto exchange such as Uniswap or SushiSwap, other tokens can also be swapped easily in order to acquire wrapped Ethereum (wETH).
Purpose of Using Wrapped Ethereum (wETH)
Updating the Ethereum’s code base and making it submissive to ERC-20 tokens within itself is actually the main aim according to wrapped Ethereum (wETH). This will eliminate the need of Ether being wrapped to achieve the goal of interoperability. However, till the achievement of this goal, wrapped Ethereum (wETH) will be utilized advantageously to provide liquidity for the NFT trading, crypto lending and also to the liquidity pools.
But it should be kept in mind that wrapping Ethereum is more of a temporary solution instead of finding a permanent one. But one can expect Ethereum to move closer to better interoperability with the passing days as a number of useful upgrades have happened in the Ethereum network over the past few years.
Procedure of Wrapping Ethereum
Though there are a number of methods by which Ethereum can be wrapped. Ethereum can be wrapped by sending it to the smart contract or on the crypto exchange by swapping with some other token. Some of the commonly used methods are described here.
- Utilizing the Wrapped Ethereum Smart Contract on OpenSea
Here we will consider the OpenSea platform in order to generate wrapped Ethereum (wETH) from ETH. We will use the wETH smart contract to achieve this task. Here are some simple steps one needs to follow to generate wETH.
On the top right corner of OpenSea is given the option of Wallet. First of all, click on that. After that, you will see that there are three dots in front of Ethereum. After clicking on those dots, choose the option of wrap.
The next step is to enter the value. One needs to decide that how much wETH he wants to generate from how much amount of ETH. After that choose the option of wrap ETH. This will result in calling the smart contract and wETH will be generated from ETH.
The user then has to sign the transaction as the MetaMask pop up appears on the screen. The wrap of ETH will be completed as a confirmation message appears on the screen. In the wallet of the user’s OpenSea account, he can see the wETH that has been converted.
The wrapped Ethereum (wETH) is distinguished from the normal Ethereum as it bears a pink Ethereum diamond logo on it.
- Creating wETH Using Uniswap
The user needs to get the wallet connected and to make sure that Ethereum network is chosen before starting to use the Uniswap platform. Then from the bottom field, choose the select token option. There will appear a list of options where one has to select wETH. Then add the value of wETH that you want to generate from ETH. After that select the wrap option.
The user also needs to confirm the transaction from the crypto wallet that is being used. This is the stage where the user also has to pay the gas fee for Ethereum. Once the user confirms the transaction details and all the details are added properly, the only thing that has to be got done is getting the transaction confirmed over the blockchain network.
- Creating wETH with MetaMask
One should make sure that the network that is selected is Ethereum mainnet, when he opens a MetaMask wallet. After that select the swap option given. Then from the Swap to field given choose the wETH. Then add the amount of ETH that has to be swapped for wETH. After that, select the Review swap option.
After that on the screen will appear a window that will display a quote of the conversion rate. The rate of the conversion should be 1:1 as ETH is being converted into wETH here. Then click the swap option in order to finalize the transaction.
What Makes wETH Unique?
Tokens can exist on a number of chains in the form of wrapped tokens such as wETH, wBTC etc. In case an investor is not using the Ethereum blockchain, instead he wants to own the Ether on Avalanche chain. For this purpose, to have the exposure to the price of ETH, he would need the wrapped Ethereum.
This practices helps in increasing the liquidity and efficiency of the assets as investors can easily deploy their assets on other blockchain only by wrapping them. Wrapping the assets also help in decreasing the fees of carrying out the transaction and the time needed for it. The gas fee for Ethereum is very high traditionally, however when it is wrapped in the form of tokens, the investors can easily trade for Ether on other blockchains at relatively very lower prices.
How Ethereum Can be Unwrapped?
By interacting with the smart contracts, one can also unwrap the Ether manually. By using the smart contracts on OpenSea, the method that is used to wrap the ETH into wrapped Ethereum (wETH) can also be adopted to unwrap it. The only difference lies where one chooses the option of wrap ETH, now he has to choose unwrap ETH option.
Similarly, by adopting the reverse method on Uniswap and MetaMask, one can also swap back the wETH into ETH. For swapping back, all the same steps have to be followed on both the platforms as mentioned above. The user just to enter the opposite values now that is from wETH to ETH.
Advantages of Using Wrapped Ethereum (wETH) Tokens
Using the wrapped Ethereum (wETH) tokens provide a number of advantages to the consumers. Upgrading the decentralized financial activities is one of them. This makes the Ethereum blockchain network as one of the largest decentralized financial system. It can now provide the users many more facilities than only the registration and validation of the transactions.
Because of the interoperability, a number of users have now to convert the ETH into wETH while using the decentralized applications. The interoperability can be accessed by using the standardized tokens while using wETH. Increasing the peer-to-peer economy and reduction of mistakes by using a set of functions is the actual job of the standardized tokens.
If the proper usage of any token is known to the developers, they would not have the fear of any mishappening or mistake and can easily deploy them in their projects. Moreover, the decentralized apps can interact with different currencies if different tokens start behaving in the same manner.
At present, in order to operate their platforms, a number of projects are leveraging the Ethereum blockchain and ERC-20 standards to issue the tokens. It is a normal practice in the world dealing with crypto assets to carry out transactions using the ERC-20 tokens.
Risks Involved in Using Wrapped Ethereum (wETH) Tokens
There are certain disadvantages of using the wrapped Ethereum (wETH) tokens that have been highlighted by the co-creator of Ethereum Vitalik Buterin by himself. The sensitivity of these tokens toward centralization is considered to be one of the major issues of wETH.
Over the Ethereum blockchain, wrapping the assets is not considered as an authentic solution and it is also difficult to automate them normally. Only the central programs can be used for wrapping purposes. This thus creates a risk of being manipulated or interfered by any external entity.
The third-party platforms that issue the wrapped tokens hold their responsibility. They have the authority to make the decisions in regard of sending the wrapped assets to the central authorities. Therefore, highlighting the issues regarding being transparent and decentralized, that are actually the main traits of the blockchain industry, Buterin expressed his concerns about the possibility of occurrence of such problems.
The holders of the wrapped tokens have to undergo additional procedures and have to take some risks. There are smart contract risks associated with the decentralized networks while many chains have the probability of getting scammed or hacked. Till the present time, there exists no way in which the coins can be wrapped being completely decentralized.
Moreover, not all the coins can be wrapped by all the chains. On the major blockchains, wETH is present but it is not necessary that tokens of all major blockchains also exist on the Ethereum blockchain networks.
What is the Future of Wrapped Ethereum (wETH) Tokens?
The blockchains can easily interact with one another by using the wrapped tokens presently. The tokens can be traded and exchanged easily between different platforms, that provide a kind of decentralized environment for trading.
However, the traders are finding updated solutions such as upgrading the code bases of the blockchains continuously so that in case of using the bridge chins, they could become compatible with one another. This will help in increasing the interoperability of the blockchain network. In addition to other network developments, Ethereum is planning to gradually close down the use of wrapped tokens such as wrapped Ethereum (wETH).
One should not think that the wrapped Ethereum (wETH) tokens will eliminate from the blockchain network. They will be there providing there assigned services and will keep on playing the crucial part in the network. As the wrapped tokens help in the maintenance of consistent prices, they can act as a force that stabilizes the different blockchain networks.
The atomic swaps that are becoming popular among the developers, the wrapped tokens also help in facilitating the cross-chain swaps. However, one can think as the blockchain network becomes more and more interoperable in the future, the wrapped tokens will become more and more less important.
Conclusion
Almost every blockchain contains the wrapped version of its native cryptocurrency. As native coins of one blockchain cannot be used on the other, wrapping the coins solve this problem of deploying them on the other chain for the users. Moreover, it also allows the users to acrry out decentralized transactions without any external interference.
Wrapped tokens help in providing the liquidity and efficiency to the blockchain networks. Wrapped Ethereum (wETH) is also pegged to the real Ether in ratio 1:1 and can be unwrapped any time. The developers can use the Ethereum platform using these tokens and can feasibly participate in yield farming on another blockchain network.
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