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      Wrapped Ether: What Is It and How Does It Work?

      Intermédiaire 5m

      Ethereum is one of the most popular and influential blockchains in the crypto space. It hosts thousands of decentralized applications (dApps) that offer various services and use cases, such as decentralized finance (DeFi), non-fungible tokens (NFTs), gaming, and more. However, Ethereum also has some limitations that prevent it from reaching its full potential. One of these limitations is the lack of interoperability with other blockchains and ERC-20 tokens.

      ERC-20 is a standard that defines a set of rules and functions for tokens on Ethereum. It allows tokens to be easily compatible and exchangeable with each other and with dApps. However, Ethereum's native token, Ether (ETH), does not follow this standard. This means that ETH cannot be directly used in many dApps that require ERC-20 tokens as inputs or outputs. For example, you cannot swap ETH for another ERC-20 token on a decentralized exchange (DEX) like Uniswap or SushiSwap without converting it first.

      This is where Wrapped Ether (WETH) comes in. WETH is a tokenized version of ETH that conforms to the ERC-20 standard. It is pegged to the value of ETH at a 1:1 ratio and can be exchanged for ETH at any time. WETH enables ETH holders to use their coins in any ERC-20 compatible platform or application without losing their exposure to ETH's price movements. WETH also solves the problem of low interoperability between blockchains, as it allows ETH to be transferred and used on other chains that support wrapped tokens, such as Binance Smart Chain (BSC), Avalanche, or Fantom.

      In this article, we will explain what WETH is, how it works, what are its benefits and drawbacks, and how you can wrap and unwrap ETH using different methods.

      What Is WETH?

      WETH is an ERC-20 token that represents ETH on the Ethereum blockchain. It was created to overcome the incompatibility issue between ETH and ERC-20 tokens. WETH allows ETH holders to access the vast ecosystem of dApps, platforms, and protocols that use ERC-20 tokens as inputs or outputs. For instance, if you want to trade ETH for another token on a DEX like Uniswap, you need to convert your ETH to WETH first. Then, you can use your WETH to swap for any other ERC-20 token on the DEX. Similarly, if you want to use your ETH as collateral in a lending platform like Aave or Compound, you need to wrap it into WETH first.

      WETH is not a separate coin from ETH, but rather a representation of it. The value of WETH is always equal to the value of ETH, as they are pegged at a 1:1 ratio. You can always redeem your WETH for ETH at any time by unwrapping it. The process of wrapping and unwrapping ETH is simple and transparent, as it involves sending your ETH to a smart contract that mints or burns WETH accordingly.

      WETH is not the only wrapped token in the crypto space. There are many other wrapped tokens that represent different cryptocurrencies on different blockchains. For example, Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on Ethereum. Wrapped BNB (WBNB) is a BEP-20 token that represents Binance Coin on BSC. Wrapped AVAX (WAVAX) is an ERC-20 token that represents Avalanche on Ethereum. And so on. The main purpose of these wrapped tokens is to increase the interoperability and liquidity of different blockchains and tokens.

      How Does WETH Work?

      WETH works by using a smart contract as a custodian that holds ETH and mints or burns WETH in response to user requests. The smart contract ensures that there is always enough ETH backing the WETH supply and that the exchange rate between them is always 1:1.

      To wrap your ETH into WETH, you need to send your ETH to the WETH smart contract address. The smart contract will then mint an equivalent amount of WETH and send it back to your address. To unwrap your WETH into ETH, you need to send your WETH back to the smart contract address. The smart contract will then burn your WETH and send you back an equivalent amount of ETH.

      There are different ways to wrap and unwrap ETH using different platforms and tools. For example, you can use a DEX like Uniswap or SushiSwap to wrap or unwrap ETH directly on their interfaces. You can also use a wallet like MetaMask or Trust Wallet to wrap or unwrap ETH using their built-in functions. You can also use a dedicated website like weth.io to wrap or unwrap ETH using their simple interface.

      What Are the Benefits and Drawbacks of WETH?

      WETH has several benefits and drawbacks that you should be aware of before using it. Here are some of them:

      Benefits:

      • WETH increases the interoperability and liquidity of ETH and ERC-20 tokens. It allows ETH holders to use their coins in any ERC-20 compatible platform or application without losing their exposure to ETH's price movements. It also allows ETH to be transferred and used on other blockchains that support wrapped tokens, such as BSC, Avalanche, or Fantom.
      • WETH enhances the functionality and usability of ETH. It allows ETH to be easily compatible and exchangeable with other ERC-20 tokens and dApps. It also enables ETH to be used as collateral, interest-bearing asset, governance token, or utility token in various DeFi platforms and protocols.
      • WETH simplifies the transaction process and reduces the transaction fees for ETH and ERC-20 tokens. It eliminates the need for multiple transactions and approvals when swapping ETH for other tokens or using ETH in dApps. It also reduces the gas fees for these transactions, as WETH is more efficient and optimized than ETH.

      Drawbacks:

      • WETH introduces a custodial risk for ETH holders. WETH relies on a smart contract as a custodian that holds ETH and mints or burns WETH in response to user requests. If the smart contract is hacked, malfunctioning, or malicious, it could result in the loss or theft of the users' funds.
      • WETH adds an extra step and complexity for ETH holders. WETH requires users to wrap and unwrap their ETH whenever they want to use it in ERC-20 compatible platforms or applications. This adds an extra step and complexity for the users, especially for beginners who may not be familiar with the process.
      • WETH creates a potential discrepancy between the supply and demand of ETH and WETH. WETH is minted and burned according to user requests, which may not always match the supply and demand of ETH and WETH in the market. This could create a potential discrepancy between the prices of ETH and WETH, which could affect the users' profits or losses.

      Conclusion

      WETH is a tokenized version of ETH that conforms to the ERC-20 standard. It is pegged to the value of ETH at a 1:1 ratio and can be exchanged for ETH at any time. WETH enables ETH holders to use their coins in any ERC-20 compatible platform or application without losing their exposure to ETH's price movements. WETH also solves the problem of low interoperability between blockchains, as it allows ETH to be transferred and used on other chains that support wrapped tokens, such as BSC, Avalanche, or Fantom.

      WETH has several benefits and drawbacks that you should be aware of before using it. Some of the benefits are increased interoperability and liquidity, enhanced functionality and usability, and simplified transaction process and reduced transaction fees. Some of the drawbacks are custodial risk, extra step and complexity, and potential discrepancy between the supply and demand.

      If you want to wrap or unwrap your ETH into WETH, you can use different methods such as DEXs, wallets, or dedicated websites. You should always do your own research and due diligence before using any platform or tool that involves your funds.

      WETH is one of the many wrapped tokens that exist in the crypto space. Wrapped tokens are an innovative solution that aims to increase the interoperability and liquidity of different blockchains and tokens. They also offer new possibilities and opportunities for crypto users who want to explore different platforms and applications without sacrificing their exposure to their original assets.


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        Wrapped Ether: What Is It and How Does It Work?