Blockchains are distinct technology because they can’t really talk to each other. Bitcoin can’t travel down the Ethereum superhighway, and Ethereum can’t even travel down its more technical (ERC-20) highway either.
That pesky little problem brings us to Wrapped ETH.
Wrapped Ethereum (wETH) solves the problem of Ethereum not being able to interact within its own high-tech playground, ERC-20, by turning the old token into something that can be used on the ERC-20 standard.
ERC-20 is the heart of modern Ethereum, smart contracts, and decentralized finance in general.
To work with smart contracts, you have to just start by trading 1 ETH for 1 wETH. The “wrapping” occurs automatically, with no loss of value. There are transaction fees involved because there is no free lunch, but there isn’t any additional wizardry you need to have to wrap or even unwrap ETH.
You could even go the centralized crypto route and pick up ETH on Coinbase currency exchange platform and then get wrapped ETH directly on Coinbase. You could transfer from Coinbase to a different wallet address as well.
Smart contracts open up big doors in decentralized finance, and if you want to travel the superhighway, you have to have the right vehicle. Wrapped ETH is just one of the many vehicles you’ll find in the DeFi world.
Want to earn a yield on your crypto tokens? You can convert wETH to a yield-earning crypto asset, like Dai. You can swap cryptos based on what’s paying the most interest or even loan out your crypto assets to others.
Since Wrapped ETH is the answer to a specific problem in the Ethereum ecosystem, don’t expect it to be a necessary tool forever. Ethereum is under active development, with new standards and a roadmap to make the native token (Ether) behave properly with updated protocols (ERC-223 is on the horizon).
After Ethereum moved from proof of work to proof of stake (referred to as The Merge), it will be interesting to see whether the crypto ecosystem will continue to need wrapped tokens at all. But for now, if you need some Wrapped ETH, it’s pretty easy to convert back and forth.
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn.
Serise Lange is a contributor to Nav.it, the money management app helping all users build a future of wealth.
