Generally speaking, “wrapped” tokens function as a “representative” for a cryptocurrency outside of its native blockchain. For example, wrapped Bitcoin (WBTC) is a proxy token that can represent one’s Bitcoin (BTC) holdings outside of the Bitcoin blockchain. WBTC is in fact, used on the Ethereum (ETH) network, and makes it possible to use decentralized applications (dApps) “directly with Bitcoin” since one WBTC is always equivalent to one BTC.
However, wrapped Ethereum (WETH) is somewhat different from other wrapped tokens. Though WETH is meant to represent ETH, WETH is an ERC-20 token designed for use only within the Ethereum network.
This might sound confusing. Why do we need to use a proxy token for ETH on its own native blockchain?
The reason is that ETH itself is not an ERC-20 token even though it is the primary token on Ethereum. This is because ETH was developed even before the ERC-20 token standard was introduced.
ERC-20 is basically the set of “rules” that tokens have to follow to be able to connect with Ethereum’s Layer-1 network. Hence, all the dApps built on top of Ethereum have to have ERC-20 tokens. Tokens like Basic Attention Token (BAT), Compound (COMP) and Aave (AAVE) are all ERC-20 tokens.
Thus, WETH is a token that allows more utility than just using ETH.
Why use WETH?
WETH is always interchangeable for the same amount of ETH, but it has a number of advantages over the latter:
WETH can be used seamlessly with dApps - Because WETH is an ERC-20 token, it is interoperable with smart contracts, dApps, decentralized finance (deFi) instruments, and decentralized autonomous organizations (DAO) that are running on Ethereum.
Some dApps will automatically convert your ETH to WETH or prompt you to do so when you try using ETH on the platform. Bidding for non-fungible tokens (NFTs) on OpenSea for example, will require that you to “wrap” your ETH into WETH first.
WETH is more economical - WETH is more economical on gas fees than ETH especially when you use dApps frequently. This is because having to constantly “wrap” ETH to WETH and “unwrap” it back to ETH again requires gas fees for processing. Whereas buying WETH directly from the start means being able to use dApps and hold the same value of ETH as if you had bought ETH all along.
Data on the current supply of WETH is unavailable, though its market price will always be equal to the value of ETH. WETH is minted by smart contracts which require locking up the same value of ETH as collateral, thus ensuring that there is always an equal amount of ETH to back the current supply of WETH.
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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.
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