Wrapped ETH vs ETH: difference and use cases
To the naked eye, Wrapped ETH seems a completely redundant asset. ‘Wrapping’ an asset typically implies the process of creating a separate Ethereum-based token pegged to the value of the original asset. That’s how Wrapped BTC, an Ethereum-friendly Bitcoin variation, came to be.
However, ETH is already on Ethereum. Creating a wrapped version of this currency seems like an unnecessary step, but it’s not useless. There is actually a difference between ETH and ETH-based tokens. This rift means that the former can’t be used as many tokens on this blockchain. That’s why Wrapped ETH (WETH) came to be.
Why is WETH needed?
Wrapped ETH, Wrapped Ethereum, or simply WETH are all names for the tokenized version of Ethereum that adheres to the blockchain’s ERC20 standard.
The standard is a collection of guidelines, principles, and commands that allow a particular token to operate on a given blockchain almost like a native coin. If a token doesn’t adhere to ERC20, it can’t be used on the Ethereum blockchain. However, even if it does, it’s not exactly on the same level as the primary currency, which is ETH.
This distinction is exactly what led to the creation of WETH. While tokens are lower in a hierarchy and can’t be used as freely, they still serve a valuable function. The ERC20-compatible tokens like USDT, BUSD, or MATIC are all tokens that were imported to the ETH blockchain and made to adhere to its principles.
There are many of them, and their presence and value compelled many projects to carve out a place for them. For instance, many dApps and DeFi solutions work on smart contracts, designed specifically to accommodate ERC20 tokens. ETH is not an ERC20 token. It’s a primary currency that predates it.
As such, it can’t be used in the same way these tokens are used.
What is WETH?
WETH is created in a way similar to many stablecoins. The asset is generated by issuing ERC20-compatible tokens, each of which is collateralized by the same amount of Ethereum. This ensures that the price of the Wrapped ETH is always identical to that of ETH, which warrants its usefulness and stability.
It also means that ETH and WETH can be converted to one another without much loss. Thanks to this, users can swap between the two whenever the opportunity calls for it. There hasn’t ever been a major dip in the value of WETH, and the exchange rate to ETH has largely been stable.
You can directly ‘wrap’ your ETH by accessing the WETH smart contract and basically exchanging the regular currency for a wrapped variety. At any moment, you can unwrap the token and receive your ETH. You can lose a small portion of the value in the process, but the process is smooth and simple.
Advantages of WETH
Owing to its functionality and stable price, WETH offers several critical advantages, that set it apart from classic ETH and give it several important use cases. Some of these advantages are:
- Interoperability. The specific tokenization of WETH ensures that it’s completely compatible with the ETH-based solutions that favor the use of ERC20 tokens rather than/or in conjunction with Ether.
- Decentralized exchanges. Decentralized exchanges on the Ethereum blockchain typically have a large number of ERC20 tokens acting as trading pairs, and WETH is a popular choice.
- DeFi protocols. Due to WETH’s nature as a token, it can be used as collateral in many decentralized finance solutions based on this blockchain. It’s particularly common in lending and borrowing services.
- Tokenization of ETH. The tokenization of WETH also means that it can interact much more efficiently with other ERC20 tokens, making this version of Ether a lot more comfortable to use in the larger ERC20 ecosystem.
- Flexibility. The increased popularity of ERC20 tokens also means that there are environments where the native currency isn’t as supported or well-integrated, making assets like WETH a more reasonable choice.
All in all, WETH accommodates several specific functions on the Ethereum blockchain. There are environments where traditional ETH is less effective, being a slightly different type of asset compared to tokens that came after. In this light, WETH serves an important purpose of widening the utility of Ether.
Is WETH still relevant?
Wrapped ETH continues to be useful in 2023. That’s despite the fact that Ether was several times updated to be more compatible with the ERC20 tokens, allowing it to be used to much greater effect on DeFi and dApp solutions that favor tokenized assets and tokens rather than the network’s primary currency.
WETH isn’t really one of the more popular wrapped assets. WBTC has largely similar functions with a much larger market cap, and many other wrapped coins are still more popular than WETH. There are several factors to this perceived lack of relevancy:
- The aforementioned changes made to the Ether protocol made much of WETH redundant, although the former still has slightly less utility than the latter.
- There is still not much utility in obtaining WETH when you can purchase WBTC just as easily, if not easier.
- A number of more helpful ERC20 tokens, like USDC and USDT, already fill much of the niche that WETH would occupy.
- Other varieties of WETH split off from the main asset over time, creating subsets such as Wrapped Beacon ETH and swETH, which diluted the concept of a Wrapped Ether.
As such, WETH is still not a worthless purchase, but its standing has been damaged over time by several factors. Wrapped ETH is supported by many solutions, as it was widely adopted many years ago and wasn’t ever revised in this capacity. In short, buying WETH wouldn’t be unreasonable.
