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

History

The Ethereum blockchain and ETH were introduced in July 2015, prior to the development of the ERC-20 standard. The concept of 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]

Overview

Wrapped tokens are digital currencies hosted on the Ethereum blockchain. They have the same value as their underlying assets, even if these assets are on different blockchains. This allows wrapped tokens to work seamlessly with other digital assets, promoting interoperability between different systems. ^[3]

Unlike Ether, wETH cannot be used for covering gas fees on the Ethereum network. However, its ERC-20 compatibility makes it suitable for investment and staking opportunities within DApps. wETH is also utilized on platforms like OpenSea for auction-based buying and selling. ^[4]

Wrapping Ether involves sending ETH to a smart contract to generate wETH. The locked ETH ensures proper backing for wETH. When wETH is converted back to ETH, the corresponding wETH tokens are removed from circulation, maintaining its value alignment with ETH. wETH can also be acquired by exchanging other tokens on platforms like SushiSwap or Uniswap. ^[4]

Supply Mechanism

WETH's supply is not bound by a predetermined limit; rather, it adapts according to demand dynamics. Upon an individual's conversion of Ether to WETH, the involved 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 both centralized and decentralized exchanges. ^[6]

In theory, a scenario may emerge wherein WETH demand wanes completely, resulting in a cessation of 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]

Use Cases

WETH functions as a conduit between ETH and ERC-20 tokens, enabling diverse applications within the DeFi sector. ^[5]

Another utility of WETH is its contribution to liquidity on decentralized exchanges. As an ERC-20 token, it becomes part of token pools on platforms like Uniswap and SushiSwap, streamlining token swaps and refining the trading process. WETH acts as a facilitator for transactions. ^[5]

WETH is also relevant in the field of lending and borrowing. By converting ETH to WETH, users gain the ability to utilize their assets as collateral across various DeFi protocols. This standardization allows for versatile access to financial services. ^[5]