Most of us know what Ethereum (ETH) is and how it works, but do you know what wETH is? With the expansion of different DeFi protocols around the world, we have seen the expansion of synthetic tokens such as wBTC and wETH, but what are these tokens all about?
In this guide, we will share with you all the details about synthetic tokens and wETH. This is one of the most popular tokens in the market to use at different protocols on the Ethereum network. We will also tell you the main differences between ETH and wETH and when you should use one or the other. That being said, let’s get into the article.
What are Synthetic Tokens?
In order to understand what wETH is, we should have some clear concepts, such as Synthetic tokens. Synthetic tokens are collateral-backed tokens that follow the price of the underlying virtual currency. There is a wide range of use cases for synthetic tokens, from futures markets to collateralized loans and many other things.
It is possible to create synthetic tokens that track the price action of stocks. Let’s say that cryptocurrency users want to get exposure to Tesla stock without having to purchase the underlying asset. A DeFi project could simply lock some Tesla stocks and create a synthetic Tesla token that could be purchased by investors in different crypto markets.
At the same time, it is also possible to create synthetic tokens that track the price of a set of assets. Let’s say that you are bullish about the future of exchange tokens, then you could purchase a synthetic token that tracks these coins. Although you would not create this synthetic token, you would simply be able to buy it from another project or protocol that offers it to users.
But in order to engage in different cryptocurrency and DeFi initiatives, you might better use synthetic tokens rather than the real underlying asset. For example, you would not be able to use Bitcoin on the Ethereum platform. However, you could buy Bitcoin’s synthetic token on the Ethereum platform called Wrapped Bitcoin (wBTC) and use it on different DeFi protocols on Ethereum.
wBTC would run on top of the Ethereum blockchain and it would track the price of Bitcoin. But the same can happen with other coins that you would like to use on different DeFi ecosystems. Understanding the added value of synthetic tokens is definitely important to know how the DeFi market continues to expand and how this is bringing new solutions to individuals and investors around the world.
What is Ethereum?
We already know what synthetic tokens are, but we need to understand what Ethereum is and how it works before we get into what wETH is. Ethereum is the second-largest blockchain network in the world after Bitcoin (BTC). Ethereum is also the largest decentralized smart contracts platform in the world. Thanks to offering advanced solutions to cryptocurrency projects and developers, Ethereum is also one of the most used virtual currencies in the world. More precisely, Ether is the virtual currency that runs on top of the Ethereum network, but people usually talk of Ethereum as both the network and the virtual currency.
Nowadays, Ethereum is used for many things. Users can stake ETH on the ETH 2.0 staking smart contract and earn rewards, users can also use ETH to pay network fees and engage on different platforms and they can also use ETH to participate on different DeFi protocols, among other things.
Of course, there are also investors that speculate on the price of the virtual currency. As it happens with almost every digital asset, its price fluctuates depending on many different factors.
Thus, Ethereum became a clear leader in the cryptocurrency market due to different reasons. Thanks to the solutions that this blockchain network is offering, it is now possible for projects and developers to release unique services to users from all over the world.
Currently, Ethereum has a price of $4,600 and a market capitalization of over $540 billion. This makes it 5 times bigger than the third virtual currency in the market, Binance Coin (BNB). This shows that there is a large interest in Ethereum and that it has proven to be among the most innovative cryptocurrencies and blockchain networks in the market over the past years.
It is also worth noting that Ethereum has added many new solutions to users in the crypto market that Bitcoin alone couldn’t offer. Indeed, advanced smart contracts on Bitcoin are currently not supported, which makes it difficult for more advanced initiatives to be released on top of BTC.
What is wETH?
With this introduction about Ethereum and synthetic coins, we now can move to explain what wETH is and how it works. Let’s start from the basics. As you could already expect, wETH is an Ethereum synthetic token. That means that this is a token that tracks the price of Ether and that runs on the Ethereum blockchain as an ERC-20 token.
New wETH tokens are created every single time that ETH tokens are sent to a smart contract. If you send 1 ETH to this smart contract, then you will receive 1 wETH in exchange. Basically, there is a 1-to-1 ratio every single time you convert ETH to wETH or vice-versa.
When you send ETH to the smart contract to receive wETH you are basically wrapping your Ether coins to get wETH, this is the reason why wETH is called in that way (wrapped Ether).
You might be asking why not to use Ether rather than wETH to engage on different DeFi platforms in the market. The main issue is related to the fact that Ethereum does not follow the ERC-20 token standard. That means that it is not possible for users to handle ETH on these platforms. This is why it is necessary to use wETH rather than ETH.
By using wETH, you would be able to engage on different DeFi platforms and protocols that run on the Ethereum blockchain. If you want to handle ETH, you would rather use wETH, which can easily be converted to ETH at any moment. Some exchanges are even offering users the possibility to exchange wETH for ETH, in this way, you do not need to engage with smart contracts.
Although wETH could be a great virtual currency to use on different platforms, it might not be the best option if you want to invest in Ethereum. We will get into the details of the pros and cons of using wETH in the next sections.
Why Should I Use Wrapped Ethereum?
Wrapped Ethereum (wETH) should be used to get access to a wide range of protocols and DeFi applications in which you would not be able to use ETH (due to the fact that it is not compatible with the ERC-20 token standard).
You should definitely not use wETH if you want to invest in Ethereum, but we will touch on this point in the next section. The goal behind wETH is to be able to get exposure to ETH without owning it. This gives us flexibility and the possibility to interact with different solutions in the cryptocurrency market.
Take into consideration that every single time that a new wETH is minted, another ETH has been deposited in the smart contract. Once you know that, you would be able to trust wETH when you trade tokens against this coin.
Over the last few years, we have seen the expansion of swapping platforms. We are talking about decentralized exchanges such as Uniswap or Sushiswap that became very popular. Rather than relying on Ethereum that cannot be exchanged for other ERC-20 tokens, you can easily trade wETH and get the tokens that you want.
You should use wETH if you want to be part of the entire crypto revolution and get access to some of the most unique features of the decentralized finance ecosystem. Of course, you could engage in these swapping platforms without having to rely on wETH, but the truth is that wETH has larger liquidity than other token pairs, which would let you get better prices and trade more efficient token markets.
Remember that the cryptocurrency market is continuously evolving, this is why you must make sure that you know which the latest developments are. Usually, by engaging with the new platforms and tokens, you would be able to learn how the market works and how new technologies shape the crypto landscape.
Should I buy ETH or wETH?
So which cryptocurrency should you buy? Ethereum or wETH? The answer would depend on many things, including on what you want to use this virtual currency. This is why it is very important to understand how wETH works and how you could use it in the future.
If you are a long-term Ethereum believer and you want to hold ETH for a long period of time, then the best thing you can do is buy Ethereum. There is nothing better than the real asset. You don’t want to hold a token (wETH) that would only be useful to represent the ETH token as an ERC-20 variant. You want to hold the real asset if you invest for the long term.
However, holding Ethereum to exchange ERC-20 tokens would not be the best thing to do. Remember that ETH would not work with other ERC-20 tokens, which means that you would not be able to exchange them. In this case, ETH would not be useful to your needs.
When you trade on swapping platforms such as Uniswap, you want to hold wETH, a coin that would let you have exposure to ETH without necessarily owning it. Additionally, it would give you the flexibility that only ERC-20 tokens would give you. If you have already traded and you want to get your ETH, you can do so in two simple ways: by using a crypto exchange with a wETH/ETH trading pair or by simply engaging with wETH’s smart contract.
Take into consideration that holding and engaging with wETH’s smart contract could be a more difficult thing to do. The best thing is usually to get the funds back using a traditional virtual currency exchange. These are the best platforms you can use in order to trade digital assets.
Pros and Cons of Using wETH
Let’s now focus on the pros and cons of using wETH. As we have discussed in this guide, in some cases, you would prefer to use wETH than ETH. In other cases, ETH would be more useful.
- wETH can be used to trade ERC-20 tokens
- wETH represents ETH and is backed by Ether tokens (1-to-1)
- It lets users engage in a wide range of crypto protocols
- You can exchange it back to ETH using different methods
- Some exchanges have also added support to wETH
- It gives you the flexibility that ETH does not have
- It is not the real underlying asset (ETH)
- wETH smart contract could be exploited if hackers find a bug
- Investors use ETH rather than wETH
Of course, there are many other things to take into consideration about wETH and ETH, however, it is obvious that it has added a large number of solutions and benefits to the entire crypto ecosystem.
You might find many other use cases for wETH. This would usually depend on how you use the token and the platforms and protocols you use. In general, wETH would be a great token for those users that want to have exposure to ETH where Ethereum does not properly work.
That being said, holding wETH is not the same as holding Ethereum. Indeed, you should use ETH as a token for a relatively short time. The truth is that wETH should only be used as a token to engage with the protocols you want rather than using it to invest or for long-term holding.
wETH has been a very useful token and it would definitely play a key role in the expansion of the Ethereum-based DeFi ecosystem in the coming years. Without synthetic tokens such as wETH and wBTC the cryptocurrency market would definitely be a please with fewer opportunities to investors and crypto lovers.