WETH, or Wrapped Ethereum, is an ERC-20 token that ETH, the native cryptocurrency of the Ethereum blockchain, fully collateralizes. It serves as a tokenized variant of ETH and is intended for use in dApps that need an ERC-20 token. ^[1]

Overview

Wrapped Ethereum (WETH) is a tokenized Ether (ETH) form that complies with the ERC-20 standard on the Ethereum blockchain. Wrapped tokens like WETH represent their original cryptocurrencies at a 1:1 value and can be converted back into the original asset at any time. This concept is similar to stablecoins, which are pegged to fiat currencies and redeemable on demand.

The primary purpose of wrapped tokens is to enable interoperability across different blockchains, which otherwise have limited compatibility. Native coins from one blockchain cannot be used directly on another. Wrapping a coin applies the receiving blockchain’s token standard to a tokenized version of the original asset, allowing it to function within that ecosystem.

Ethereum’s native cryptocurrency, ETH, does not follow the ERC-20 token standard that most fungible tokens on Ethereum adhere to, which complicates its use in decentralized applications (dApps). WETH was introduced to address this by providing an ERC-20 compatible version of ETH, enhancing interoperability and usability within dApps.

Wrapped tokens require custodians, which can be smart contracts or other mechanisms, to hold the original asset as collateral. When ETH is sent to such a custodian, an equivalent amount of WETH is minted. This maintains the same value while enabling WETH to interact seamlessly with other ERC-20 tokens in decentralized finance (DeFi) applications. On Ethereum, WETH is commonly used in decentralized exchanges and other dApps where only ERC-20 tokens are accepted. Other blockchains may have their versions of wrapped Ether to facilitate similar functionality. ^{[7] [8]}

History

The Ethereum blockchain and ETH were introduced in July 2015, before the development of the ERC-20 standard. ERC-20, which establishes a uniform token standard, was initially introduced in November 2015. Consequently, while tokens employed by Ethereum's decentralized applications adhered to the ERC-20 standard, the Ether cryptocurrency itself did not follow this standard. ^[6]

In 2017, the 0x project team introduced WETH to address the interoperability challenges between various decentralized exchanges and dApps on the Ethereum network. During that period, distinct token standards among DEXs hindered asset movement across platforms. WETH aimed to establish a standardized, interoperable system by tokenizing ETH for seamless trading and integration with other dApps and DEXs. The initial WETH contract went live on the Ethereum mainnet in January 2018. ^[2]

Supply Mechanism

A predetermined limit does not bind WETH's supply but adapts according to demand dynamics. Upon an individual's conversion of Ether to WETH, the smart contract generates newly minted WETH tokens. Conversely, when WETH is exchanged for Ether, an equivalent quantity of WETH is retired. ^[6]

Despite its 1:1 pegging to Ether, marginal fluctuations (typically below 1%) may arise between WETH and Ether, influenced by variables such as Ethereum's transaction fees and trading activities on centralized and decentralized exchanges. ^[6]

In theory, a scenario may emerge wherein WETH demand wanes completely, ceasing token circulation. Conversely, heightened market interest in WETH leads to an expansion in its supply. This contrasts with non-pegged cryptocurrencies, where supply protocols frequently incorporate restrictions or scheduled issuance patterns. ^[6]