Wrapped Ether Meaning

What is Wrapped Ethereum?

Wrapped Ether (WETH) is a tokenized version of Ether (ETH), the native currency on the Ethereum network. It facilitates direct and decentralized peer-to-peer (P2P) trading between Ether and ERC-20 tokens on decentralized exchanges (DEXes) and Ethereum-based decentralized applications (dApps).

To create WETH, Ether is sent to a smart contract where it is held as collateral. In return, the investor receives WETH tokens that have the same value as the original ETH. This means that wrapped tokens use a mechanism like that of stablecoins to peg to the original cryptocurrency at a 1:1 ratio. Wrapped coins may also use custodians like a merchant or a multi-signature wallet to hold the collateral.

The WETH or wrapped Ethereum can also be “unwrapped” or redeemed back to the original Ether by sending it back into the same smart contract.

Wrapped ETH was developed to improve the interoperability between chains and, since Ether does not conform to ERC-20 standards, enable the use of  Ether in dApps. Wrapping Ethereum improved functionality and allows a smooth exchange between Ether and ERC-20 standard tokens without the need for third parties. This eradicates the need to develop two different interfaces (one for Ether and another for ERC-20 tokens) within the same smart contract. Thus, one smart contract can be utilized for wrapping and unwrapping ETH. Common use cases for WETH include DeFi activities, such as yield farming.

Since investors can deploy and utilize wrapped Ether on other platforms, the liquidity and capital efficiency of the network is significantly improved. In addition, Ethereum experiences high gas fees, so wrapping ETH helps investors to trade Ether at lower costs by lowering gas fees while reducing transaction times.