What Is Wrapped Ethereum (WETH)? – Forbes Advisor

If you’re interested in knowing more about Ethereum (ETH), you may have come across mentions of Wrapped Ethereum (WETH). But what is Wrapped Ethereum? What purpose does it serve, and how does it differ from Ethereum?

It can be quite technical to understand the distinction between ETH and WETH, and the reason for WETH. So let’s break it down WETH into simple terms.

WETH, Ethereum and Smart Contracts

To understand WETH, you need to grasp how the Ethereum blockchain and smart contracts work.

Ethereum is often described as a distributed computing platform. Think of the Ethereum blockchain as a giant computer network on which developers can build decentralized applications (dApps) that can do nearly anything that a conventional computer program can do.

Many developers use the Ethereum network for “smart contracts.” These are self-executing programs where the terms and rules of the contract are encoded on the blockchain, making execution and settlement automatic, trackable and irreversible.

Here’s a simple example of how smart contracts work. One person bets that the temperature in London will peak at 80 degrees Fahrenheit or greater on July 15 next year, while another party bets the opposite—that the temperature will peak below 80 degrees Fahrenheit.

Both parties lock a set amount of ETH in a smart contract that governs their wager on the blockchain. 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.

How Does WETH Work?

Smart contracts are the core of the dApps that run decentralized finance (DeFi) on the Ethereum blockchain. The native token of the Ethereum blockchain—Ether—is used to pay for the operation of these dApps and smart contracts on the blockchain.

Here’s where WETH comes in. While Ether usually runs dApps and smart contracts on Ethereum, it doesn’t always integrate seamlessly with every single, smart contract or dApp.

WETH allows ETH to be universally compatible across all dApps and smart contracts. ETH and WETH trade 1-to-1 and ETH can be converted to WETH and back again—or “wrapped,” in the jargon of Ethereum—at any time. Besides transaction fees, there are no additional costs involved.

While the technical details regarding the intrinsic differences between ETH and WETH are complex, the concept is intuitive.

‘Wrapped’ Tokens Are Not Unique to Ethereum

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.

Another way to think of wrapped tokens is by looking at stablecoins. 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.

A dollar stablecoin like USD Coin (USDC) is pegged 1-to-1 to the U.S. dollar, similarly to how WETH is pegged to ETH. Just note that the technical differences under the hood are very different (more on that later).

WETH vs. ETH

When you send ETH to a smart contract and receive WETH, the contract will lock up the ETH before distributing the equivalent amount of WETH.

This locked ETH can only be accessed when the same amount of WETH is returned in an “unwrapping transaction,” where WETH is converted back 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.

This is exactly how the 1-to-1 peg between ETH and WETH is maintained. There’s nothing to pull the redemption price away from 1-to-1 since it’s predefined in the code that governs the smart contract. The ETH is locked up while the WETH remains in circulation.

Another way of thinking about WETH and ETH is that the former is a derivative of the latter, which allows users to carry out more functions within the cryptocurrency world.

How to Convert ETH to WETH

Ethereum users convert ETH into WETH via a process known as wrapping.

Wrapping involves sending Ethereum to a smart contract that provides WETH in return. Your ETH, which will be locked up in the smart contract as discussed above, will be visible on the blockchain in this contract, while WETH will be credited back to your crypto wallet in return.

Interacting with smart contracts directly is quite technical. A common way to carry out the wrapping is via a decentralized exchange, such as Uniswap (UNI).

This involves connecting a crypto wallet like MetaMask to a decentralized exchange like Uniswap. Hit the “Connect Wallet” in the top right corner of the exchange, as seen in the below image. Then select ETH as the asset to be swapped, and then presto, WETH is the asset received.

It’s worth noting that the user will need to hold some ETH in their wallet to pay gas transaction fees. Gas fees are denominated in ETH rather than WETH.

Following this transaction, the WETH will sit in the same wallet that you connected to your chosen decentralized exchange (DEX) in place of the ETH.