What Is Wrapped Ethereum? How Does It Work?
If you are an avid crypto trader, you’ve likely encountered the term Wrapped Ethereum (wETH). Wrapped cryptocurrencies allow the usage of any crypto coin on any blockchain apart from the one they were initially built on. These tokens facilitate interoperability and aid in increasing DeFi utility and liquidity in addition to smart contract platforms.
Wrapped ETH is one such crypto. As it is built on the popular Ethereum, the WETH price has been constantly increasing, and the token has become crucial for traders who participate in DeFi activities or utilize wETH for various purposes across blockchains.
In this blog post, we break down wETH for you in simple terms and explain how it works.
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wETH, Ethereum, and Smart Contracts
To understand wETH, it is vital that you first understand the functioning of the Ethereum blockchain and smart contracts.
Ethereum operates as a decentralized computing platform. Think of it as a vast computer network on which developers can create decentralized applications (dApps) that perform almost anything conventional computer programs can.
Most developers use the network for smart contracts. These are self-executing programs where the contract’s terms and conditions are encoded on the blockchain. This makes it easy to automate and track execution and settlement.
Here is a simplified example of how smart contracts work: Person A bets that it will rain in Istanbul on a certain day and Person B bets the. The two parties lock a certain amount of ETH in a smart contract that governs their bet on blockchain. If it rains on Christmas in Istanbul, the smart contract automatically executes, releasing the ETH to the winner and vice versa.
What Is Wrapped Ethereum?
Now that you understand the crucial terms surrounding wrapped Ethereum, it is easier to answer this question. Wrapped Ethereum, in simpler terms, is a wrapped version of Ethereum. The wrapped token increases Ether’s interoperability by making it usable on blockchains compatible with ERC-20.
So, is it safe to trade and invest in wrapped Ethereum? The answer is a big yes. wETH is pegged to the ETH price at a 1:1 ratio, so they are essentially the same. The only discrepancy between wrapped tokens and their underlying assets is their use cases, particularly for coins like Ether and Bitcoin, which have been around for a long time.
How Does Wrapped Ethereum Work?
Smart contracts are the backbone of the dApps that run decentralized finance (DeFi) on the Ethereum blockchain. Ether – the native Ethereum blockchain token – is the means of payment for the operations of the smart contracts and dApps on the blockchain. This is where wETH enters the mix. Although Ether runs the blockchain’s smart contracts and dApps, this doesn’t mean it integrates seamlessly with each of them.
wETH allows ETH to achieve universal compatibility across all smart contracts and dApps. The two trade one-to-one and ETH can be converted to WETH at any time, and the process is reversible.
How to Wrap ETH
Ethereum users can convert ETH into wETH through a process referred to as wrapping. It involves locking Ethereum in a smart contract that provides wETH in return. Your ETH held in the smart contract will be visible on the blockchain in this contract, while in return, your crypto wallet will be credited with wETH.
However, direct interactions with smart contracts can be very technical, so most traders turn to decentralized exchanges. You only need to link your wallet to a cryptocurrency exchange and deposit the ETH amount you want to wrap. Next, the exchange confirms the transaction and sends the WETH to the ETH address indicated in the wallet. Swapping WETH back to ETH requires a simple reversal of the abovementioned process. The only difference is that you have to click on ‘Unwrap WETH’ instead of ‘Wrap ETH.’
