If you have never dealt with wrapped cryptocurrency, you are likely asking yourself ‘what exactly is a wrapped token’? Similar to exchanging a one dollar paper bill for four quarters, a ‘wrapped token’ is merely one token that is swapped for another token (with equal value) via blockchain code or smart contracts. Similar to how you are unable to use Euros to purchase goods in the US, you essentially cannot use Matic to purchase assets on the Ethereum blockchain. Most blockchain systems fail to offer fluid interoperability which can be very frustrating for crypto holders. Due to the fact that blockchains operate as autonomous systems, it is very difficult for different systems to communicate with each other.
This is where wrapped tokens come into play! Wrapped tokens essentially make it possible to use cryptocurrencies from one blockchain on a different blockchain. Although there are several benefits to wrapped tokens, such as liquidity and interoperability, we would be remiss if we did not mention the limitations of wrapped tokens as well. While there are various financial benefits to wrapped tokens it is important to note that while wrapped tokens should essentially have the same value as the original token it represents, there can be periods of high volatility subsequently resulting in the wrapped token having a lower value than the original. Wrapped tokens increase interdependence among cryptocurrencies, however, this is done at the risk of spreading a financial crisis among cryptocurrencies.
Are you still with me? Perfect, let’s dive in.
Now, for the question of the day: what is the difference between ethereum and wrapped ethereum ‘WETH’? Why do we need a wrapped version of Ethereum to conduct transactions on Ethereum's blockchain? Let’s explore what caused the demand and ultimate creation of WETH! ETH and WETH are fundamentally different tokens. If you are not aware, WETH follows the ERC-20 standard and ETH does not.
ERC-20 is defined as ‘the technical standard for fungible tokens created using the Ethereum blockchain’. Because it is not technologically feasible to use ETH for many DEFi applications, WETH (an ERC-20 compatible standard) was created to be used across a wide variety of decentralized apps. Wrapping the ETH token in an ERC-20 compatible standard also means that users can create their own versions of tokens for any custom DeFi applications they have access to. But remember, in the case of value, WETH is economically equivalent to ETH, meaning that there is no price difference between ETH and WETH.
We hope this helped in understanding the difference between ETH and WETH. Let us know if we should dive deeper into how wrapped tokens work next!