What is wrapped ether used for?

Wrapped Ether (wETH) is primarily used to enable Ethereum's native cryptocurrency, ETH, to participate seamlessly within the broader decentralized finance (DeFi) ecosystem. As an ERC-20 token, wETH allows ETH to be compatible with a vast array of DeFi applications and smart contracts that strictly adhere to the ERC-20 standard, which ETH itself does not native adhere to.

Understanding Wrapped Ether (wETH)

Wrapped Ether (wETH) is an ERC-20 token that maintains a direct 1:1 peg to the price of Ethereum (ETH). This means that one wETH is always equivalent in value to one ETH. The "wrapping" process essentially locks up your ETH in a smart contract and mints an equivalent amount of wETH. Conversely, "unwrapping" wETH burns the wETH and releases the corresponding ETH from the contract. This mechanism ensures that wETH's value remains stable relative to ETH, while granting ETH the flexibility of an ERC-20 token.

Primary Uses of Wrapped Ether

wETH extends the utility of ETH by making it compatible with more applications, opening up various possibilities within the crypto space.

Trading on Decentralized Exchanges (DEXs)

A significant use case for wETH is facilitating trading on decentralized exchanges (DEXs). Many DEXs, especially those built on Ethereum, are designed to work exclusively with ERC-20 tokens. Since native ETH is not an ERC-20 token, it cannot be directly traded against other ERC-20 tokens on these platforms without a compatibility layer.

By wrapping ETH into wETH, users can:

• Trade ETH against other ERC-20 tokens: For example, you can trade wETH for stablecoins like USDC or other altcoins like UNI on platforms like Uniswap or SushiSwap.
• Provide liquidity: Users can add wETH to liquidity pools on DEXs to earn trading fees, contributing to the decentralized exchange's functionality.

Providing Collateral on Lending Platforms

Another crucial application of wETH is its use as collateral on decentralized lending platforms. These platforms, such as Aave or Compound, allow users to borrow cryptocurrencies by putting up other digital assets as collateral.

Using wETH as collateral enables users to:

• Secure loans: Users can deposit wETH to borrow other cryptocurrencies (e.g., stablecoins) without selling their underlying ETH, maintaining their exposure to ETH's price movements.
• Earn interest: Some platforms allow users to earn interest by lending out their wETH to borrowers.

Cross-Chain Compatibility

wETH also plays a vital role in enabling cross-chain functionality for Ethereum. While ETH primarily resides on the Ethereum blockchain, wETH can be "wrapped" on other blockchain networks with the help of cryptocurrency bridges.

This allows ETH's value to be utilized in different blockchain ecosystems, such as:

• Layer-2 solutions: Bridging wETH to scaling solutions like Polygon or Arbitrum allows users to benefit from faster transactions and lower fees while still interacting with the underlying value of ETH.
• Other compatible blockchains: Some bridges allow wETH to exist and be used on other EVM-compatible chains, expanding its reach beyond the Ethereum mainnet. This facilitates asset transfer and DeFi interactions across different networks.

Summary of wETH Uses

The table below summarizes the key applications of Wrapped Ether:

In essence, Wrapped Ether serves as a crucial bridge, allowing the core value of Ethereum's native asset to fully integrate and thrive within the expansive and growing ecosystem of ERC-20 compatible decentralized applications and protocols.