Wrapped Ether (WETH): Using Your ETH Funds in Decentralized Apps

17 February, 2023
In one of our earlier articles on wrapped tokens, we covered the crypto world’s leading Bitcoin-based wrapped asset — WBTC — which allows the use of Bitcoin (BTC) funds on Ethereum’s numerous decentralized apps (dApps). This is because Bitcoin cannot be directly used in dApps without the wrapping conversion. Many of you might naturally assume that Ethereum’s native crypto, Ether (ETH) is safe from these limitations. Incredibly, the Ether crypto also cannot be used in its own chain’s dApps without a somewhat similar conversion mechanism.

In this article, we cover the curious case of Wrapped Ethereum (WETH), an Ethereum-based crypto token designed to facilitate the use of Ether funds on Ethereum’s dApps.
What Is WETH?
Wrapped tokens are typically used to resolve cross-chain incompatibilities. However, another use case for these tokens includes resolving token standard inconsistencies on the same blockchain. WETH is one such token.

WETH is an ERC-20 compatible token designed to enable the use of Ethereum’s native cryptocurrency, Ether, within the blockchain’s dApps. You might be wondering why not use Ether directly. The issue is that Ether, despite being Ethereum’s underlying crypto token, does not conform to the ERC-20 token standard that the vast majority of Ethereum’s dApps use.

The Ethereum blockchain and its Ether crypto were launched in July 2015, before the ERC-20 standard was created. The ERC-20, as a unified token standard, was first proposed only in November 2015. As a result, while the tokens used by Ethereum’s dApps ensured compliance with this standard, the Ether cryptocurrency did not.

This made the use of Ether directly in the dApps impossible. WETH was launched in order to resolve the standard inconsistency. WETH is pegged to Ether at a 1:1 rate. Any Ethereum user may swap Ether for WETH and vice versa at this fixed rate. Unlike Ether, WETH is freely usable within dApps on the chain, opening up opportunities for Ether holders to benefit from the platform’s rich ecosystem.
WETH Wrapping Procedure and Custodian
An Ethereum user who would like to swap Ether for WETH may send their funds to WETH’s smart contract address on the platform. The user is issued the same amount of WETH in exchange for their deposit. The WETH funds can then be used like any other ERC-20 token for on-chain operations such as staking, liquidity pool mining, and swapping.

If the user decides to swap their WETH back for Ether, they may use the same smart contract address for the swap.

Unlike many other wrapped tokens, WETH does not have a centralized custodian acting as a guarantor of funds or the peg. Instead, the funds are in the custodianship of a decentralized protocol on Ethereum.

WETH was developed in 2017 by a group of blockchain programmers from 0x Labs. 0x Labs itself is an open-source community initiative that involves people dedicated to the development of the Ethereum platform and its ecosystem.

0x Labs is not a for-profit company and has no control over the WETH token. The entire operation and custodianship of WETH are carried out in a completely decentralized way using Ethereum’s in-built transaction validation procedures.
WETH Supply Mechanism
A pegged crypto token’s supply mechanism is one of the key determinants of its ability to maintain the peg. WETH has no supply limit, and its entire supply fluctuates depending on demand for the token. When a user swaps Ether for WETH, a new supply of WETH is minted by the smart contract. Conversely, when WETH is swapped for Ether, the WETH amount is immediately burnt.

As of now, WETH has a supply of slightly more than 4 million WETH. While the token maintains a 1:1 peg to Ether, there are often small fluctuations (typically of no more than 1%) around this rate between WETH and Ether due to the involvement of factors such as Ethereum’s gas fees and the token’s trading activity on centralized and decentralized exchanges.

In theory, if the demand for WETH declines to zero, no tokens will be in circulation. The higher the market demand for WETH, the more its supply will grow. This is different from non-pegged cryptocurrencies, whose supply rules often specify limitations or timed-release schedules.
The amount of Ether in public hands is only 2nd to the crypto world’s undisputed leader, Bitcoin. As of today, Ether’s circulating supply is approaching the equivalent of $ 200 billion, with many crypto investors holding the cryptocurrency in their portfolios. These funds could be put to use on Ethereum’s dApps to generate yields and leverage other services on the chain. With WETH being the default token for enabling Ether on the dApps, we expect its use to grow strongly over the coming years.