TL;DR (SUMMARY)
Wrapped Ether (WETH) is a token pegged to Ether (ETH). WETH is used on various platforms and DApps that support ERC-20 tokens. While ETH is used to pay network transaction fees, it does not have the same functionality as ERC-20 tokens.
You can easily convert ETH to WETH through a process known as wrapping. You can also convert WETH back to ETH at any time. Both wrapping and unwrapping follow a 1:1 ratio, which means there are no additional costs other than transaction fees.
You can wrap your ETH manually by interacting with the WETH smart contract, which will store your ETH and return the exact same amount in WETH.
The Ethereum 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. You can even find wrapped ETH on other blockchains to use in their ecosystems. Popular uses of WETH include NFT trading, providing liquidity to liquidity pools, and crypto lending.
Introduction
If you use Ethereum, it is likely that most of the tokens you trade and invest in use the ERC-20 token standard. Using this technical standard has become a popular option for Decentralized Applications, wallets and projects as it offers practicality for most users. However, this fact has presented a problem for Ethereum's native currency, Ether.
Ether does not follow the same rules as ERC-20 tokens, but there is a demand to use it in ERC-20 DApps as well. Wrapped Ether is the solution to this problem, and you may have already found it. Let's see why it has become a useful tool for investors and holders in so many projects and DApps.
¿Qué es Wrapped Ether (WETH)?
WETH is an ERC-20 token on Ethereum pegged to the price of Ether (ETH). While Ethereum's native token, ETH, can be used to pay gas fees, WETH cannot. However, WETH has a wider range of use cases than ETH and is very popular in the Decentralized Finance (DeFi) ecosystem. MetaMask, TrustWallet and almost any wallet on the Ethereum network supports WETH. Let's explore some of its use cases.
Why should you wrap ETH?
At first, it may seem confusing why we have a token like WETH. Doesn't ETH already exist on the Ethereum blockchain anyway? The first thing to understand is that not all Ethereum tokens are technically the same. The network allows developers to create new rules and standards for cryptocurrencies.
An example would be the ERC-721 format that gives us non-fungible tokens (NFT). These act very differently than ERC-20 tokens or Ether. Developers have a lot of room for customization when creating these digital assets. So while ETH can be used to pay gas fees on Ethereum, ETH cannot be used on all DApps.
Most DeFi DApps today accept ERC-20 tokens for investment and staking opportunities. If we want to add ETH to a liquidity pool or use it as collateral, it is much easier to have it in an ERC-20 version. This provides the greatest compatibility on the blockchain and saves time developing new smart contracts.
How to wrap Ether (ETH)?
The process of generating WETH is simple: send your ETH to a smart contract which then provides you with WETH in return. This means that all WETH created is completely backed by ETH reserves. Your ETH is locked in escrow in the smart contract and you can get it back by handing over the WETH. When your ETH is returned, the contract burns the supplied WETH.
To wrap Ether, you can interact directly with the WETH smart contract, so it takes your ETH and credits WETH to your wallet at a 1:1 ratio (you must pay transaction fees). Converting WETH back to ETH requires another smart contract interaction, but the process is more or less the same.
However, it is much easier to exchange another token for WETH using a cryptocurrency exchange. Let's see how you can exchange your ETH for WETH using Uniswap DEX or directly through your Metamask wallet.
Wrapping the ETH and Uniswap
1. Open Uniswap and connect your wallet. Make sure Ethereum is also selected as your network.
2. Select ETH in the top field and WETH in the bottom field. If you click [Select Token], you should see WETH at the top of the list.
3. Enter the amount of ETH you want to convert to WETH and click the [Swap] button.
4. Now you will need to confirm the transaction in your cryptocurrency wallet. Don't forget that you'll also need to pay the gas fee, so make sure you have extra ETH on hand. Check that the transaction details are correct and click [Confirm].
5. Now all you have to do is wait for the transaction to be confirmed on the blockchain. The waiting time will depend on the network traffic at that time. If you're in a hurry, you can expedite the transaction (i.e. pay higher fees) to get it confirmed faster.
Wrapping the ETH and MetaMask
1. Open your MetaMask wallet and make sure your network is [Ethereum Mainnet]. Then click [Swap].
2. In the [Swap to] field, search for WETH.
3. Enter the amount of ETH you want to exchange and click [Review Swap].
4. You will now see a quote showing the conversion rate (which should be 1:1). Click [Swap] to complete your transaction.
How to unwrap Ether (WETH)?
As mentioned above, you can unwrap Ether manually by interacting with a smart contract. However, it is simpler and safer to swap WETH for ETH. To do this, follow our previous Uniswap or MetaMask instructions, but make sure to switch from WETH to ETH. You can also use Binance to convert your WETH.
1. Go to the Binance OTC and Conversion Portal. Select WETH in the [From] field and ETH in the [To] field, and then click [Conversion Preview].
2. You will now see the details of the transaction. Make sure you check them carefully before accepting the swap. Please note that Binance does not allow you to swap ETH for WETH using this method.
Can you wrap ETH on other blockchains?
Other wrapped versions of ETH exist on major blockchains, increasing the interoperability of ETH. Using wrapped ETH on BNB Smart Chain (BSC), for example, allows you to trade or use WETH within the BSC DeFi ecosystem. To do this, you will need to withdraw ETH from Binance or another exchange to your BSC wallet. Make sure your exchange supports ETH to WETH conversion before withdrawing.
Alternatively, you can use a bridging service. These are third-party DApps that take cryptocurrencies and store them on the source blockchain, and then mint wrapped tokens at a 1:1 ratio on the destination blockchain.
Bridging tokens often works well, but keep in mind that moving tokens across blockchains can involve risks. There have been cases where the smart contracts of some bridges have been compromised. If you want to bridge wrapped Bitcoin, wrapped Ethereum, or another token, carefully research the platform you are interested in before using their bridging services.
How does wrapped ETH stay at the same price as ETH?
The key to maintaining WETH to ETH pegging is its 1:1 convertibility. If WETH is cheaper, people buy it and convert it to the more expensive ETH to make a profit. This opportunity would increase the demand for WETH and therefore its price. If WETH is more expensive, people buy ETH and convert it to WETH to sell, increasing the supply of WETH and lowering its price. These supply and demand principles ensure that the anchor remains relatively stable.
What DeFi applications can I use WETH with?
Ethereum has many DeFi DApps to explore that accept ERC-20 tokens. One option is to add WETH to a liquidity pool available on a Decentralized Exchange (DEX) like Uniswap. By providing liquidity, you can start earning commissions from users who swap their tokens through the pool. However, impermanent loss is always a possible risk that will cause a decrease in the amount of tokens deposited. Using a pool with a greater amount of liquidity will reduce this risk.
You can also start lending your WETH on a platform like Aave. Other users can borrow your tokens, but they must first provide collateral to cover their loan. In exchange, you will receive interest until you decide to withdraw your deposit.
Conclusion
Ethereum has one of the oldest and most developed DApp ecosystems in existence. This makes WETH a necessity as many ETH holders want to use their ETH in DeFi projects. If you decide to start experimenting with WETH, we recommend purchasing it with ETH or other tokens, as it is simpler and more convenient than interacting with wrapping smart contracts.
