Wrapped Ethereum or WETH is an ERC-20 token built on the Ethereum blockchain. This token is used by Ethereum users to interact with decentralized applications. It is pegged with ETH in a 1:1 ratio. That means both the tokens have the same value.
In this article, you will read in detail about WETH and understand its features and peculiarities that make it compete with other ERC-20 tokens.
How does WETH work?
ETH is converted to WETH through a process called wrapping. To wrap ETH tokens, you send the required number of ETH tokens to the smart contracts of WETH, which then hold the ETH and release an equal number of WETH tokens. If you want to convert WETH back to ETH, you can send the WETH back to its smart contracts, which will accept the WETH and release ETH. This process is called unwrapping. Since ETH and WETH hold the same value, users will not incur any loss in the whole transaction.
What is the Use of WETH?
WETH is used to overcome the limitation of ETH, which is incompatible with DeFi applications because it is not an ERC-20 token. Most decentralized applications and DeFi protocols are built to be ERC-20 compliant. To overcome this limitation, WETH was made with ERC-20 compliance. With WETH, all DeFi activities such as token swaps, liquidity provision, and yield farming are made easy and efficient. WETH is used for liquidity provision by decentralized exchanges. That means users will have enough liquidity to trade ETH tokens.
Moreover, WETH allows interoperability and bridges ETH with other ERC-20 tokens.
Difference Between ETH and WETH
The table below marks the difference between ETH and WETH.
| ETH | WETH |
|---|---|
| ETH is the native currency of the Ethereum blockchain. | WETH is an ERC-20 token built on the Ethereum blockchain. |
| ETH is a storehouse of value that you can use for transactions and payment of gas fees. | WETH is used as a replacement for ETH for interacting with dApps, decentralized exchanges, and DeFi protocols. |
| ETH is compatible with the native blockchain. | WETH is an interoperable asset that can be used in cross-chain applications. |
| ETH cannot be directly converted to other ERC-20 compatible tokens. | WETH can be swapped with ETH on a 1:1 ratio. |
| The value of ETH is determined by the market forces. | WETH’s value is pegged with that of ETH in a 1:1 ratio. |
Advantages and Disadvantages of WETH
Here are the advantages and disadvantages of WETH.
| Advantages | Disadvantages |
|---|---|
| WETH can be used on ERC-20-compliant dApps and DeFi protocols. | Converting ETH to WETH is a long process that some users may see as an inconvenience. |
| It is used to provide liquidity for ERC-20 tokens on various exchanges. | Since WETH is also based on the Ethereum blockchain, it is liable to the risks associated with Ethereum. |
| WETH is more accessible and compatible for users than ETH. | WETH is more complex for users who only have a basic understanding of blockchain technology. |
Final Thoughts
WETH was designed to address the limitations of ETH and enable the Ethereum protocol to scale across all decentralized applications. More than just a technical turnaround, WETH is a powerful tool to help users navigate the DeFi landscape. With this token, you can realize the full potential of the Ethereum blockchain.
Frequently Asked Questions (FAQs)
ETH and WETH have different functionalities. ETH is used for everyday transactions, investments, and ICOs. WETH is used for DeFi and token trading on DEXs. Your use cases determine which one to choose.
Yes, WETH can be converted back to ETH. To convert WETH to ETH, you should submit the WETH tokens you possess to WETH’s smart contract and get an equivalent amount of ETH in exchange.
No, WETH cannot be used in other blockchains. This is because WETH is native to the Ethereum blockchain, and it does not match the functionalities of other blockchains.
WETH and ETH have the same value and price as they are 1:1 pegged. They can be replaced with each other, based on their functionalities.