By Larry Wright
The crypto market provides everyone with a vast number of opportunities not only in terms of trading but also in exploring the space to understand what is going on at the moment and understanding the twists and turns of the market so they can orchestrate their own investment in a particular asset. Bitcoin remains the first-ever cryptocurrency to ever surface on the horizon of the crypto market. It remained the only cryptocurrency for various years back; then, many other players started to emerge within the market, such as Ether which became a direct competitor of Bitcoin in 2014.
It is the second-largest cryptocurrency, and it laid the foundation for altcoins which are the crypto tokens other than Bitcoin; these are too many in number thanks to the idea of decentralization becoming mainstream and people along with financial enterprises continuously adopting the whole thing. Ether has evolved so much since its launch back in 2014, and now it features multiple aspects and elements that are directly or indirectly tied to the idea of decentralization.
You can use the blockchain of Ether for the sake of developing decentralized apps, running multiple smart contracts over its blockchain, and using it to host multiple other tokens and decentralized projects in real-time. One such element that is a direct descendant of Ether blockchain is wrapped Ether which is a token that has its value pegged to Ether. Wrapped Ether is being used in multiple platforms and decentralized apps which currently support ERC-20 tokens. Ether as a crypto token can be used to perform multiple transactions for the network and pay for network transaction fees, but it doesn’t enjoy the same functionality as other ERC-20 tokens do.
Significance of Wrapped Ether
You must not confuse wrapped Ether with that of normal Ether because both are completely different in terms of execution and their significance being crypto tokens. You can convert Ether into wrapped Ether via a process that is known as wrapping. Suppose you have converted some Ether into wrapped Ether, but you don’t require it anymore, and you want to convert it back; you would be glad to know that the reaction is completely reversible, and you can convert your wrapped Ether into normal Ether whenever you want.
There is a 1:1 ratio when it comes to wrapping and unwrapping, and it also means that there are no extra costs for this conversion process other than the transaction fees that will be incurred to you once you get on with this dedicated transaction. If you really think about it, you would find the process to be extremely eccentric and sophisticated.
You can wrap your Ether by yourself by interacting with the Ether smart contract. This contract is connected with a mainstream wrapped Ether wallet, which is going to store your Ether tokens and give you back wrapped Ether to this same exact amount of Ether that you gave for initiating the exchange.
The DeFi ecosystem of Ether is comparatively large, and using wrapped Ether provides you with much more opportunities for the sake of investing and staking within the blockchain. There are multiple versions of wrapped Ether available, some are more popular than others, and at the end of the day, it depends on your own preference and the task for which you require these tokens.
You can find wrapped Ether on various other blockchains that are compatible with their respective domains, or they are used in that particular ecosystem. Some of the most elementary use cases for wrapped Ether include their usage for purchasing non-fungible tokens, trading in digital assets, offering liquidity to liquidity pools, and also in crypto lending.
What is an ERC-20 Token?
If you have used Ether in the past, then you already know that most of the crypto tokens that you create and invest in are more likely to use the ERC-20 token standard. This particular standard has become extremely popular among decentralized applications, wallets, and various other projects because it offers extreme practicality to the users and, on top of everything else, is much more secure and compatible with a wide range of tokens and crypto disciplines.
This might be a really promising way of interacting with the world of decentralization, but at the same time, it has presented the native token of Ethereum with a problem.
Ether token does not follow the same rules as the ERC-20 token system does; still, there is a demand to use the Ether token in the ERC-20 decentralized apps, but since it is not compatible, there exists a problem. Wrapped Ether comes off as a practical solution to this problem, and if you continuously interact with decentralized apps and other disciplines on the Ether blockchain, then the chances are that you might have already come across this solution yourself.
To be able to understand why wrapped Ether has become a much more significant token not only for investors but other crypto holders out there in many decentralized projects, you must look at first try to bring down any walls of not knowing with wrapped Ether itself.
A Brief Introduction to Wrapped Ether
Wrapped Ether is an ERC-20 token present on Ether having its value pegged to the price of a single Ether token. Ether can be used to pay for gas fees on the native blockchain of Ethereum but wrapped Ether, on the other hand, has a wider range of possibilities and use cases within itself and is extremely popular among various recent decentralized finance ecosystems and multiple wallets which revolve around Ether and other various blockchain systems.
If you are new to decentralization, then you might be wondering why there is a need to have wrapped Ether onboard, whereas we have instant access to Ether native token on the blockchain? The very element that you need to understand here is that not every token is similar to one and the other, and there are a broad number of tokens to choose from, and each and every one of these is aligned with specific functionalities within the blockchain system.
The network in itself allows developers to be able to create new rules and standards for different tasks and purposes while making these tokens a preferred vehicle for these tasks and being able to program them accordingly. Many decentralized finance apps are accepting ERC-20 tokens at the moment for the sake of investment and staking. This example would better help you to understand the prospect of wrapped Ether and why it is an important one even if we have a native Ether token.
Suppose you want to use the native Ether token for the sake of staking, and you want to add it to a dedicated liquidity pool; now, you would have to stake all your native Ether tokens in real-time so that you can achieve the final purpose behind the investment you are making. Whether or not those native Ether tokens would be compatible with the decentralized finance platform that you are using is simply a whole other case.
Most of these platforms won’t budge with the native Ether tokens and require ERC-20 feasibility. This is going to provide you with an immense element of compatibility spanning across multiple blockchain systems while at the same time saving an immense number of hours that would otherwise be spent on developing new smart contracts.
How to Wrap Ether?
As explained earlier, there isn’t much rocket science here that you need to abide by. If you want to convert your native Ether tokens into wrapped Ether, simply send the tokens into a smart contract which would provide you with wrapped Ether tokens while taking in the native Ether tokens for themselves. It also means that all wrapped Ether tokens developed through this method are backed up by native Ether tokens that you have submitted for the release of the wrapped alternative.
Your Ether would remain locked securely within the smart contract, and you can exchange it anytime you want with wrapped Ether once your use has come to an end. When you get your Ether back, the contract is going to burn the wrapped Ether tokens which you earlier provided so that no other user could use these at all.
You can approach the wrapped Ether smart contract directly for the sake of wrapping Ether, and the contract is going to take away your Ether tokens and will provide your wallet with wrapped Ether, for which you would still have to pay a dedicated transaction fee. Similarly, when you want to convert your wrapped Ether back into a native Ether token, you would have to come across another interaction with the smart contract in question, but the overall method is purely identical.
Remember that you would still have to pay another transaction fee for this particular exchange to take place. You can also use the services of a crypto exchange for the sake of getting access to another token by giving away wrapped Ether. You can use multiple exchanges and wallet systems present out there for the sake of wrapping and unwrapping Ether according to your usage or preference.
How to Unwrap Ether?
As explained earlier, it is relatively easy to unwrap Ether manually, and to do so; you just have to interact with the smart contract. This way, you could get your wrapped Easter converted into a normal Ether token, but still, it is simpler and safer to go with swapping wrapped Ether for a normal Ether token. Simply go to any dedicated crypto exchange or wallet that can carry out this transition and select the option that you are changing wrapped Ether into a normal Ether token.
Fill out other required fields and then click on preview conversion. There you will be able to see the complete details of the trade. Make sure that you are checking each and everything out and all the information that you have filled in there is completely relevant and accurate. Once you have made sure that everything is in order to carry out the transaction and you will have successfully swapped wrapped Ether with normal Ether tokens.
Wrapped Ether on Other Blockchains
The wrapped versions of Ether do exist across multiple blockchains out there, which only increases the interoperability of Ether with other blockchain systems and decentralized enterprises. You can use the native Ether on multiple decentralized exchanges, which would allow you to trade Wrapped Ether within the very decentralized ecosystem you are going to use this thing on.
To be able to do this, you would have to withdraw a certain amount of Ether tokens from the exchange that you are using to conduct the transaction. Also, make sure that whatever exchange you are using actually supports this transition or conversion from Ether to wrapped Ether before you put out the request to initiate the withdrawal. If the selected crypto exchange does not facilitate this exchange, then you can use a dedicated bridging service, as these are the third-party decentralized apps that would take cryptocurrency such as Ether and store it on the original or intended blockchain.
Once the token has been submitted to the official blockchain, the minting of wrapped tokens could take place on the destination blockchain, which then could be made available to the user who requested the initiation of the transaction.
The bridging of the tokens mostly works just fine, but when you are moving tokens across multiple blockchains, there are going to be risks that you must be aware of beforehand. In the past, there have been a few instances where some of the bridges got their smart contracts compromised, and multiple bogus transactions got conducted with no original record or data to conduct a thorough analysis of the problem.
It doesn’t matter which cryptocurrency you want to wrap; just perform careful research into the platform you are about to use before going with the bridging service. Because if you don’t, then the chances are that the transition is going to be extremely lackluster and full of technical holes and errors.
Price Behavior of Wrapped ETH
Many professionals out there are astounded by the inevitable scheme of conversion that takes place when converting wrapped Ether into a normal Ether token. How come the price and value of both these tokens remain completely the same? The very reason is that both undergo a 1:1 convertibility. Suppose if wrapped Ether was a bit costly as compared to normal Ether tokens, then people would just convert all of their Ether tokens into wrapped Ether, and no one would be using the normal token anymore.
Therefore to avoid the unjustifiable provision of financial power to wrapped Ether, both the normal and the wrapped version have the same value. If wrapped Ether was more costly as compared to normal Ether, then there would be a serious flux of demand as well as the price for wrapped Ether as compared to normal Ether token. If it was expensive, then people would be converting their normal Ether tokens into the Wrapped Ether so they could sell these for a profit.
This would eventually increase the supply of Wrapped Ether but at the same time lower its price, and that would not have been an accommodating sight at all. The very principle of supply and demand that is in effect here makes sure that the feasibility and conversion of both these tokens into each other remain completely stable.
DeFi Apps and Wrapped ETH
Ethereum, at the moment, has a variety of decentralized apps available which allow you to explore relative ways to conduct business with ERC-20 tokens. One potential option that you can seek here is to add your wrapped Ether into a liquidity pool that is made available on a decentralized exchange such as Uniswap.
After you have provided liquidity, you would soon start to earn fees from the users who are at the moment swapping their tokens utilizing the pool in which your tokens are staked. But you must not get acclimated to the concept because the impermanent loss of tokens remains a possible risk that might ultimately decrease the available number of tokens that you have deposited.
Therefore it is recommended to use the pool with a conveniently large amount of liquidity which would substantially reduce this risk. You can also begin lending your wrapped Ether on certain platforms where other people can borrow your tokens for the time being; to do so, they would have to provide you the collateral in the form of regional Ether tokens.
You continue to earn a handsome fee for the duration your tokens are being used by the borrower, and there is no time limit as well; you can just want to remove your deposit whenever you want. Ether, without any doubt, has the oldest and relatively more developed decentralized application ecosystem, which makes Wrapped Ether a potential necessity because many holders of the normal Ether tokens want to use these in multiple decentralized finance projects.
If you do want to experiment with wrapped Ether, then it is recommended that you buy it using either the native Ether token or some other relatively cheaper token to get your hands on as many wrapped Ether tokens as possible.