Wrapped tokens are cryptocurrency tokens whose value is tied to that of the underlying cryptocurrency.  The original token can only be used on the native network, however, the wrapped version of the token may be used on a network other than the native network.

This is the primary distinction between the original token and the wrapped version of the token. Wrapped versions of their respective native cryptocurrencies are available for both Bitcoin and Ethereum. Let’s take a close look at everything that’s wrapped with Ethereum (WETH).

So What Is WETH?

WETH is an Ethereum-based ERC-20 token that is tied to the price of Ethereum (ETH). It cannot be used to pay gas costs, although ETH, Ethereum’s native coin, may be used to do so. WETH, on the other hand, offers a greater variety of use cases than ETH does. And is particularly popular in the ecosystem of decentralized financial transactions (DeFi). WETH is going to be supported by a wide variety of wallets on the Ethereum network, including MetaMask and TrustWallet. Let’s look at some of its possible applications of it.

Wrapping ether enables the direct and error-free exchange of ERC-20 tokens for Ethereum. Without the requirement for a trusted third party or the incurrence of extra risks such as unanticipated problems occurring during transactions as a consequence of sophisticated implementations.

WETH is used in lieu of ether by several Ethereum-based decentralized apps (dApps). Such as decentralized exchange platforms, to permit direct and decentralized peer-to-peer trading between ether in “wrapped form” and ERC-20 tokens using the same required specifications.

How Does It Work?

Transferring ether to a smart contract is required in order to wrap ether tokens. The return on the smart contract will be in the form of wETH. During this time, ETH is frozen so that there will always be a reserve to support the wETH.

When wet Ether is converted back into Ether, the wet Ether that was converted is either destroyed or taken out of circulation. This is done in order to guarantee that the value of wETH will always be proportional to the value of ETH. You may also get wETH by trading other tokens for it on a cryptocurrency exchange like SushiSwap or Uniswap. These are just two examples.

Therefore, why bother using Ethereum that has been wrapped? According to the information provided by WETH.io, the long-term objective is to bring Ethereum’s codebase up to date and make it ERC-20 compliant on its own. This will ultimately make it unnecessary to wrap Ether for the purpose of interoperability. However, until that time comes, wETH will continue to be helpful for a variety of purposes. Including but not limited to crypto lending, trading in NFTs, and supplying liquidity to liquidity pools.

Because wrapping Ethereum is more of a workaround than a permanent solution. It is not really an issue of ETH vs wETH. In a nutshell, the question is moot. Ethereum seems to be inching closer and closer each day toward improved interoperability. As a result of the many enhancements that are planned to take place on the Ethereum network over the course of the years.

Why WETH?

Tokens may exist on many chains because to a technology known as wrapped tokens, which includes WETH, WBTC, and others. For example, an investor who wishes to retain Ethereum but utilize it on the Avalanche chain would need Wrapped Ethereum. In order to have price exposure to ETH while avoiding the usage of the Ethereum chain. 

For example, an investor who wishes to retain Ethereum but utilize it on the Avalanche chain would need Wrapped Ethereum. In order to have price exposure to ETH while avoiding the usage of the Ethereum chain.  

Because it enables investors to encapsulate their assets and deploy them on other blockchains, this practice boosts the liquidity of blockchains and the capital efficiency of its users. 

Because of its reputation as a “safe haven” asset in the cryptocurrency industry. Bitcoin has gained a lot of traction recently as a result of this trend. Wrapping Bitcoin allows investors to keep their cryptocurrency while still making use of it for yield farming or other DeFi activities.

Wrapping coins may cut down on the amount of time and money needed for transactions. Especially Ethereum is plagued by excessive gas costs; hence, wrapping it on another blockchain makes it possible for investors to exchange Ether at a much-reduced price.

Pros

  • Interoperability with standardized tokens is something that WETH offers, as was discussed before. This leads to an improvement in the economy since there is very little opportunity, if any, for making mistakes as a consequence of this.
  • In the same vein, wETH gives you the ability to conserve gas while working inside the Ethereum network. This is due to the fact that wETH may be traded on a DEX for other ERC-20 tokens. In a straightforward manner. Trading ERC-20 tokens is made easier as a result. The costs of operations and the charges associated with them may be lowered. That is if the number of operations that take place on the Ethereum blockchain is decreased.
  • It should not be assumed that registering and verifying transactions is the whole of Ethereum’s capability. Users will have a difficult time switching from ETH to WETH due to WETH’s higher level of consistency. Because of this, the development of a financially decentralized system is accelerated.

Closing Thoughts

Tokens that are wrapped in extra layers of security are now what allow blockchains to communicate with one another. As a result, we may have a more spread system where tokens can be freely moved around across exchanges.

Future improvements to blockchain interoperability include making blockchains’ codebases interoperable with each other and deploying bridge chains. At the very least on the Ethereum network, wrapped tokens like wETH will be phased away as the network evolves.

To sum up, wrapped tokens assist in getting over barriers associated with using different blockchains. They have a large supply, allowing you to perform transactions on several blockchains quickly and cheaply. WETH and other wrapped coins have limitless potential thanks to the development of decentralized finance.

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