What is wETH, its protocol, use cases, and benefits?
Ether can be wrapped in several ERC standards. However, wETH (Wrapped Ether) generally refers to Ether's version compatible with the ERC-20 standard.
Originally, Ether was not compatible with the ERC-20 standard. Being the currency of the Ethereum blockchain, Ether was created before the implementation of ERC-20 and several other standards.
The creation of wETH resulted in some peculiarities, and unique use cases, among several other benefits we'll look at.
What is wETH?
Wrapped Ether(wETH) is created by transferring Ether to a dedicated smart contract, which places the currency on hold while outputting wETH ERC-20 tokens. The exchange of the ETH for wETH occurs at a 1:1 ratio and can be reversed easily in a process called 'unwrapping' at the same ratio.
Thanks to wETH, developers don't have to create systems for two tokens – Ether and ERC-20s. By wrapping Ether, unnecessary complexities are eliminated from smart contract interfaces.
Furthermore, since a smart contract handles the wrapping, there's no need for trusted third parties or the risk of errors. The protocol has found significant use cases in many Ethereum-based dApps (decentralized applications).
Understanding The wETH Protocol
The sound protocol facilitating the creation of wETH makes it highly secure and foolproof. Beyond eliminating complexities, the wrapped token allows seamless interactions within the same technical standard. Hence, wETH finds use in highly advanced interactions on Defi applications.
The wrapping Smart Contract locks up ETH within it to maintain a concrete reserve backing the wETH output if the ratio of ETH to wETH shifts from 1:1, some of the latter will be burned when it's being unwrapped.
Both the wrapping and unwrapping processes occur at no additional costs – all you have to pay are transaction fees. Also, since wETH can be easily created and exchanged on platforms like UniSwap, MetaMask, etc., it has found some incredible use cases.
The use cases of wETH
Because the ERC20 standard premises numerous dApps, wETH has been used for several cases. Here are some of the popular uses of wETH:
You can easily trade wETH for ERC20 tokens on decentralized exchanges. Though there's a slight restriction here – the trade is only possible on decentralized exchanges supporting ERC20 tokens.
The blockchain and cryptocurrency ecosystems have redefined the global financial system. A prime example of this is the use of wETH for payments. Supporting dApps allow using wETH to pay for transaction fees and other services.
Furthermore, since wETH is at a 1:1 ratio with ETH, users don't incur extra charges during such transactions.
Decentralized lending platforms allow using wETH as collateral. This is good news for users who don't want to sell their ETH.
Like other cryptos, wETH can be used for investment. The 1:1 ratio at which wETH is pegged accounts for the favourable investment opportunity it is. This is because of the value of wETH, which increases in direct proportion to ETH. Hence, wETH is an excellent investment opportunity if you see potential in ETH.
What are the benefits of wETH?
Created by Will Warren, the co-founder and CEO of Ox Labs, wETH has several advantages. Here are some benefits of wETH:
Despite wrapping Ether to create wETH, it doesn't lose its interoperability. wETH has interoperability capabilities with other ERC-20 tokens. Hence, you don't have to worry about compatibility and collaboration issues.
wETH makes it possible for decentralized applications to reach a higher level of interoperability. This comes in handy as applications and platforms are aiming for an increased level of collaboration. Furthermore, integration with other blockchains progresses seamlessly.
wETH is created by a custodian smart contract that ensures stability in its value. Hence, it enjoys increased liquidity than other native tokens. Thanks to the custodian contract, wETH can easily be converted to ETH, which makes it a really attractive asset class to stakeholders.
Enhanced security is the standard with wETH since its custodians exclusively transact over secure exchanges. Furthermore, there's a reduced risk of users losing their cryptocurrencies since the custodian secures the private keys in a safe location.
Speed And Lower Transaction Fees
Transactions with wETH also proceed fast and at lower fees against unwrapped ETH.
The Ethereum blockchain is one of the oldest and most developed ecosystems for dApps. This makes wETH an essential token since it facilitates easy usage of different DeFi apps without compatibility issues. Now is the best time if you haven't started using wrapped ETH.