Wrapped Ethereum (wETH) is an ERC-20 token that represents the Ethereum token (ETH) on a 1:1 basis and is designed to interact with decentralized finance (DeFi) protocols.
WETH is designed to improve upon the functionality of ETH by making it compatible with the ERC-20 standard, enabling an easier integration with Ethereum decentralized applications (dapps).
Importantly, wETH can be used on other Ethereum layer-2 chains like Polygon and Avalanche, as well as on other blockchains like BNB Chain.
Who created Wrapped Ethereum?
WETH was created in 2017 by several key players in the Ethereum ecosystem, including MakerDAO, Dharma, and Kyber Network, who recognized that ETH didn’t align with the ERC-20 token standard.
This incompatibility created friction, limiting ETH's usability in many DeFi applications. To address this, these developers and projects created wETH to be widely accepted as a liquidity token in DeFi applications
How Does Wrapped Ethereum Work?
The process of creating wETH involves "wrapping" ETH, which equates to converting it into an ERC-20 token. This is done through a smart contract, a self-executing code on the Ethereum blockchain. The mechanics work as follows:
- Wrapping: You send your ETH to a smart contract who then mints (creates) an equivalent amount of wETH and sends it to your wallet.
- Unwrapping: When you want to convert your wETH back to ETH, you send it back to the smart contract, who burns (destroys) the wETH and returns the original ETH to you.
The value of wETH is directly tied to the value of ETH, ensuring anyone can always exchange it back at a 1:1 ratio for ETH. Further, due to the minting and burning mechanism, the supply of wETH is dynamic and increases and decreases based on how much ETH is wrapped and unwrapped. Theoretically, there can only ever be as many wETH as circulating ETH.
Use in DeFi
WETH's primary function is to provide ETH holders with access to the many opportunities afforded by the vibrant DeFi ecosystem, including:
- **Lending and borrowing – **wETH can be deposited as collateral on decentralized lending platforms to borrow other cryptocurrencies or can be lended to earn potential interest.
- Trading on DEXs – wETH is a common asset in decentralized exchanges (DEXs) liquidity pools like those found on Uniswap, making it easy to swap for other tokens.
- Yield Farming – Many yield farming strategies involve providing liquidity with wETH to earn additional rewards.
wETH appeals to a wide range of individuals within the DeFi space, including ETH holders who wish to leverage their assets for various decentralized finance activities, traders and investors seeking increased liquidity on decentralized exchanges, and DeFi protocols that require ERC-20 compatibility for their operations.
Wrapped Ethereum essentials
- Wrapped Ethereum (wETH) is an ERC-20 token that acts as a bridge between Ethereum's native ETH and the DeFi ecosystem, allowing for seamless interaction with decentralized applications.
- wETH is created by "wrapping" ETH through a smart contract and can be "unwrapped" to redeem the original ETH at a 1:1 ratio.
- wETH has various use cases in DeFi, including lending, borrowing, trading on DEXs, and yield farming, making it a valuable asset for those looking to participate in the decentralized finance space.