Wrapped tokens might be difficult to wrap your head round, even if you've been in DeFi a while. What's difference between WETH and ETH? Would the real Ether please stand up?
You use WETH all the time to interact with DeFi protocols and Ethereum smart contracts. But why can't you just use ETH? The short answer is that ETH isn't compatible with its own ERC-20 token standard, so to make the most of all DeFi has to offer, it has to be wrapped.
Ethereum's native currency Ether (ETH) can't be used for a majority of apps built around ERC-20s, but when you wrap it you get an ERC-20 token that lets you use your ETH holdings with smart contracts, and app developers don't need to add extra logic to support ETH interactions. Tokenize everything, including ETH!
Wrapped ETH unlocks the best features of decentralized exchanges (DEXs), like limit orders, gasless swaps and protection from sandwich attacks. WETH also plays a role in cross-chain interactions and liquidity provision, powering much of the DeFi ecosystem. Ready to learn more? Let’s wrap!
What is WETH and why do I need it?
You need WETH when you want to use your ETH to interact with other ERC-20 tokens or most DeFi smart contracts. To wrap native Ether, you send ETH to the WETH smart contract which is designed to return an equal amount of ERC-20 tokens called WETH. Once you have your wrapped tokens, you can set Limit Orders on your favorite DEX aggregator, or bridge the value you wrapped in ETH over to other networks like Polygon or Base. WETH makes ETH practical in the emergent web 3 ecosystem.
Need WETH? Use Matcha to wrap and unwrap ETH without added fees.
How to wrap ETH
Wrapping a token on Matcha is as simple as selecting the native token and wrapped token in the Trade module, saying how much to wrap and clicking the Wrap ETH button.
To wrap ETH into WETH:
- Click Trade or select the search bar and select WETH on the Ethereum network.
- Select ETH from the Sell dropdown in the Trade module.
- Enter how much ETH to swap for WETH.
- Click Review order. You will be shown the gas cost of the wrap.
- Select Place order to wrap your ETH.
To get your ETH back, just repeat the process but select WETH as the token to Sell!
Unwrapping WETH
You can unwrap your WETH back to its native ETH by using Matcha, just choose WETH as the token to Sell, and ETH as the Buy token. This method will interact with the same smart contract that locked the ETH in the first place and return an equivalent amount of ETH. WETH is pegged to ETH at a 1:1 ratio, so every 1 WETH you unwrap will return 1 ETH.
To unwrap WETH into ETH:
- Click Trade or select the search bar and select WETH on the Ethereum network.
- Select WETH from the Sell dropdown in the Trade module.
- Enter how much WETH to swap for ETH.
- Click Review order. You will be shown the gas cost of the unwrap.
- Select Place order to unwrap your WETH for ETH.
Why unwrap your WETH? There are some instances where you need native Ether, such as paying gas fees to send ERC-20 tokens around. ETH is also considered more secure than WETH, making it preferable for long-term custody. Note that you will not be able to wrap or unwrap ETH or other native or wrapped tokens without holding enough of the native token to pay for gas costs.
WETH vs. ETH: key differences
Wrapped Ethereum, or WETH, is different from Ethereum because at its core is a distinct smart contract that accepts ETH as a deposit and gives an equivalent amount of WETH tokens in return. They are not the same token: the ETH you locked up continues to exist, though it can't be moved, while the WETH comes from newly issued supply. Other native EVM-based tokens like WMATIC and WBNB also achieve ERC-20 compliance through this workaround.
The data structure of WETH is like that of a standard ERC-20 token, with functions like transfer(), approve()and balanceOf() implemented, as well as methods to wrap and unwrap ETH. Once you have wrapped ETH, the process is reversible, so your WETH can be converted back to ETH using a platform like Matcha.
"by abstracting ether as an ERC20 compliant ether token, smart contract code can be simplified by eliminating special business logic for handling ETH" - Canonical WETH (2017)
While ETH and WETH are closely related, you should understand their differences before diving deep into DeFi ecosystem. WETH was introduced to make ETH more useful and allows it to provide a competitive source of liquidity in various DeFi applications that expect ERC-20 tokens, ensuring that Ethereum remains relevant across a broad range of dApps.
Where did WETH come from?
Wrapped Ether was developed as an open-source project by a team including MakerDAO, 0x and Gnosis. The early 0x team helped drive community consensus and adoption of the WETH contract, as documented in the article canonical WETH which included a proposal for the smart contract.
At the beginning, different apps would use different versions of the WETH smart contract, so users would have to migrate their WETH from one version to another. The earliest version of the 0x protocol, shown in the screenshot above, helped users to migrate their WETH from an outdated smart contract version to the current version. Solving this need to hop between contracts was a crucial step in scaling the use of wrapped Ether.
The current WETH smart contract in use today emerged from this effort, launching a few months later. WETH is designed to allow interoperability between different DEXs and dApps on the Ethereum network and is now central to cross-chain bridging. A canonical WETH smart contract was deployed on the Ethereum mainnet in January 2018 and has grown into one of the most-used public goods in the entire DeFi ecosystem.
How is WETH used?
WETH is used for decentralized applications (dApps) and decentralized exchanges (DEXs), where it commonly serves as a trading pair on DEXs like Matcha to let you trade seamlessly for other ERC-20 tokens and leverage Matcha Auto to reduce trade reverts or paying fees from the token you receive instead of using ETH for gas.
Because it’s convenient to simply wrap ETH for use in DeFi, WETH is also integral to yield farming. By converting ETH to WETH, you can use it to provide liquidity to liquidity pools and receive token rewards in return. Decentralized margin trading platforms also require collateral in the form of ERC-20 tokens, and WETH is again often most convenient.
WETH gas fees
To get WETH, you first have to wrap Ethereum by sending a transaction to the WETH contract address. You can do this on Matcha just by swapping ETH for WETH. Because the wrapping is a smart contract transaction, there is a gas fee to pay. Unwrapping WETH back to ETH also requires a gas payment. WETH and ETH will have similar gas costs to transact with on Ethereum, but once you have WETH you can bridge it to another network to take advantage of lower fees.
Converting your ETH to WETH also helps you manage gas through features like Matcha Auto, which takes gas costs from the token you receive, so you don't need to worry about not having enough ETH left to unwrap your WETH after trade transaction costs. At the same time, Matcha Auto provides MEV protection, handles gas costs in real time to get your trade executed faster, and minimizes trade failure rates, just some of the benefits made possible by wrapping.
Other wrapped tokens
WETH is just one among many wrapped tokens, each serving a similar purpose but on different EVM-compatible blockchains. WBNB is Wrapped Binance Coin for BNB Smart Chain, and WMATIC is Wrapped MATIC for the Polygon network. Some layer-2 networks use ETH and WETH in the same way as Ethereum, as shown in the table below.
To move ETH to another network, you will need to use a cross-chain bridge. Other assets such as Bitcoin have also been tokenized into WBTC using similar methods, where the wrapped token inherits attributes from the asset it pegs to, including the price.
Risks of wrapped assets
The WETH contract is so widely used that it is considered foundational to DeFi and has been rigorously tested as a financial tool over a long time period, making it generally considered safe to use.
Wrapping and unwrapping tokens does involve making transactions which require gas, so try to time your conversions outside of congested periods and make sure you leave enough ETH in your wallet to cover unwrapping, too!
Not all wrapped tokens will be legitimate but WETH is one of the fundamental contracts that underpin DeFi, and has been subject of security audits. That said, it's crucial that you stay wary of the risks associated with interacting with smart contracts. You can quickly look up the token you are trading from the Matcha Trade module to be sure it’s an official contract.
Wrapping up WETH
Wrapping is a versatile way to tokenize a native asset into a token that can be used in DeFi. Ethereum treats ETH differently from tokens, while ERC-20 tokens have been created by the community to serve its needs, leaving us with WETH and ETH existing alongside each other as a byproduct of the rapid technological development in the crypto space.
Using smart contracts, native cryptocurrency can wrapped and reissued as an ERC-20 token which is compatible across the crypto ecosystem. There have been proposals to make Ether natively compatible with the ERC-20 standard, but until then WETH is here to stay.
The pace of development that Ethereum has seen since WETH came into play has led to a myriad of derivative tokens including staked tokens like stETH and rETH, and bridged tokens like USDbC which was quickly replaced by native USDC but remains the volume leader. As markets mature and L1s upgrade, this might converge to a smaller set of assets, but until then you can wrap, unwrap and swap WETH and over 4 million other tokens on Matcha.
