Wrapped Ethereum: A Solution to Interoperability

In this article, we will get into the details of wETH and its effects on Ethereum blockchain application development like DeFi. 

Understanding Wrapped Ethereum (wETH)

A wrapped Ethereum (wETH) is a tokenized version of Ethereum (ETH) at a 1:1 ratio. Essentially, it is an ERC-20 token pegged to the value of the ETH. Users can swap their wETH with ETH but cannot use them as transaction fees. 

Suggested Read | ERC-20 Token Standard | Things You Must Know

The Issue with Ether (ETH) 

DeFi protocols run with the help of smart contracts. ERC-20 is among the most popular token standard on Ethereum, and most smart contracts rely on this standard. Following the rules of this standard, any token can become compatible with Ethereum and its related platforms. Additionally, the ERC-20 token is a widely accepted blueprint for token development across other blockchains like Avalanche and Polygon. This standard removes a requirement for custom codes for new tokens. 

However, the founders introduced ERC-20 standard way after the development of Ethereum's native currency, ETH. It means that ETH does not adhere to this standard by default. It creates an incompatibility between ETH and ERC-20 tokens. Consequently, many dApps can work with ERC-20 tokens but are not compatible with ETH. 

Wrapped Ethereum addresses this issue by making Ethereum compatible with the ERC-20 token standard. It is an ETH wrapped in an ERC-20 standard. It enables platforms with ERC-20 to support ETH.

Check It Out | ERC-20 Token Standard | A Compact Guide to Development

The Working of Wrapped Ethereum 

Users can send their ETH to a wETH smart contract, which then generates wETH in return. Meantime, smart contracts lock the ETH to maintain a reserve for wETH. 

Users can also unwrap their ETH after depositing them into the contract. The computer code will remove or burn wETHs from circulation to ensure constant value. It will give an equal amount of ETH to depositors. 

Users can get wETH by swapping them with other crypto tokens on various exchanges. 

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Benefits of Wrapped Ethereum

wETH offers the following benefits: 

Interoperability

wETH resolves the interoperability issue of Ethereum by allowing seamless interaction between Ethereum and other ERC-20 tokens. It improves the overall efficiency and facilitates transactions in the network.

Price Stability

Since smart contracts peg wETH to ETH price at a 1:1 ratio, their values remain the same. It ensures a stable and constant value of wETH that is essential for smooth trading in DeFi apps. 

DeFi Compatibility

As wETH is an ERC-20 token, it is compatible with many DeFi applications and protocols.

Enhanced Liquidity

wETH ensures liquidity within decentralized exchanges (DEXs). It facilitates easy trade and execution of transactions. 

Simplified Token Swaps

wETH simplifies ETH swapping with ERC-20 tokens. It serves as a bridge between both types of assets. Further, the token streamlined the user experience. 

Explore More | Blockchain Interoperability: Importance, Challenges, and Solutions

Future Possibilities of Wrapped Ethereum

Wrapped Ethereums facilitate the interaction between Eth and ERC-20 tokens, enabling a much more decentralized ecosystem. It offers trade and exchange between different Ethereum-based platforms. 

They play a crucial role in offering valuable services to Ethereum users. It may also serve as a stabilizer between various blockchains and maintain consistent prices among them.

Need to know more about wrapped Ethereum or wish to create a token using the ERC-20 token? Our blockchain experts can provide you with assistance. Contact us to avail yourself of our services.