If you're familiar with cryptocurrency you've probably heard of some of the native crypto coins; Bitcoin, Ethereum, maybe Dogecoin. Once you begin exploring things like DeFi, dApps, and web3 you might begin seeing a new token referenced a lot; wrapped ETH or wETH.
What is the difference between ETH and wETH, and what's the point in "wrapping" ETH to use it?
What is a Wrapped Token
A wrapped token, like wETH, is a token that represents the currency that it's wrapping. If you hold 1 wETH, you can exchange that for 1 ETH, it will always have the same value.
In technical terms, wETH is a token represented by a smart contract on the Ethereum blockchain, but in simple terms, you can think of it like a cheque. Instead of having a $10 note (ETH), you have a piece of paper that's worth $10 (wETH) which you can exchange at the bank to get your regular old $10 back.
Why are we Wrapping Tokens
Okay, so we've gone through what a wrapped token is, but another important question is why wrap them?
At its creation, Ethereum was a new blockchain network and cryptocurrency similar to Bitcoin. For every transaction you want to send, you need to sign it before sending it, similar to entering your PIN code or CVV when you use your credit card.
Soon after the ETH currency was working, its creators introduced "smart contracts" which allowed for managing data on the blockchain beyond just ETH transactions.
This led to the creation of a few other things; tokens that also get exchanged on the same blockchain as ETH such as USDT or SHIB, and dApps such as currency exchange's that allow users to trade tokens, or platforms to buy and sell goods, all managed entirely on the blockchain.
dApps were slowly standardized to use a particular kind of token, called the ERC20 token standard. This allowed new features for tokens like giving permission to a dApp to use them on your behalf, which meant that dApp's could start having advanced features like auctions and scheduled transactions.
So why does ETH need to be wrapped? Well, it can't do the same things ERC20 tokens can.
If you wanted to use ETH to make a bid on an NFT or schedule a transaction to someone a week from today, you would need to wait until it happens and sign off on the transaction. It would be like scheduling a bank transfer to pay your bills, then having to open your bank app and enter your PIN code exactly when you want the scheduled transfer to happen.
To solve this issue, rather than trading ETH for another token with a different value, the wETH token was created to have a token exactly equal to ETH.
When you use your wETH on any dApp, it has the same value as ETH; it's akin to passing a cheque to someone; it can be passed on ten more times without your knowledge before the final recipient redeems it back for regular money, or in this case ETH.
The main difference between an actual cheque and wETH is that you need to trade your ETH for wETH, so it can never bounce due to a lack of funds like a real-world cheque.
How do You get this Wrapped ETH
The most common way to get wETH today is to trade your ETH for wETH on an exchange like Uniswap or SushiSwap, which can be sold back for regular ETH again on any exchange.
The technical details behind the scenes involve interacting with the smart contract.
To "wrap ETH" users would send ETH to the wETH smart contract and receive an equal amount of wETH. To "unwrap wETH", users send wETH to the wETH smart contract which would return regular ETH. The contract then "burns" the wETH to ensure that no wETH is used that isn’t backed by an equal amount of ETH locked in the smart contract.
The average user will never need to worry about the behind-the-scenes portion of this; there's so much wETH being traded today that an exchange is the only way most users will know of to get wETH.
Now you understand what wrapped tokens are, why they're needed, and how to get them, you can go forth and play around in the world of dApps and web3 and enjoy using your cryptocurrency wherever you go! Remember to be careful when granting any platform access to your money, make sure any platform you interact with is safe and well-reviewed before granting any access to anything you own.
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