If You’re Looking to Unwrap Ethereum, Take a Look Here

The cryptocurrency universe is built on the promise of decentralization, so recordkeeping is ensured by multiple anonymous validators whose roles might change depending on the consensus mechanism each blockchain uses. The system is always on, enabling worldwide transactions 24 hours a day, 7 days a week. Bitcoin and Ethereum are undoubtedly the most popular cryptocurrencies in the market. According to the experts, comparing Bitcoin to Ethereum is like comparing electricity with gold because there’s no comparison. Bitcoin may be the more established and mainstream of the two, but Ethereum is more complex and innovative, providing a wide range of applications.

Within the Ethereum world, one term might have caught your interest: wrapped Ethereum. Wrapped Ethereum uncovers multiple opportunities in the DeFi space for developers, technologists, designers, users, HODLers, and enthusiasts. It facilitates allocating funds to DeFi protocols and trade ERC-20 tokens. Many dApps, cryptocurrency wallets, and exchanges support ERC-20 tokens. According to Binance, several ERC-20 tokens on the blockchain have distinct and one-of-a-kind implementations; they’re fungible, meaning they can be exchanged for one another. The idea of wrapping Ethereum might seem confusing at first, but with time, you’ll get a good understanding of the details.

Wrapped Ethereum Is a Tokenized Version of Ethereum

Wrapped tokens offer a way to use Ethereum (and other cryptocurrencies) on blockchains other than the ones they were initially built on. Nearly every major blockchain has a wrapped version of its native cryptocurrency, and the mechanism of such tokens is similar to that of stablecoins. To be more precise, stablecoins were the first type of wrapped tokens, being pegged to a reference asset, such as the US dollar or gold. Wrapped Ethereum is basically an ERC-20 token that’s pegged to the value of Ethereum, so it can be redeemed for the original version anytime. One wrapped Ethereum will always be equal to one Ethereum.

The only difference between wrapped Ethereum and Ethereum is their use cases. The tokenized form of Ethereum makes it possible for you to engage with dApps, DeFi protocols, and smart contracts that require ERC-20 tokens. Due to the low interoperability of blockchains, one blockchain’s inherent digital currency can’t be used on another chain. As an example, you can’t use Ethereum on Bitcoin or the other way around. Wrapping Ethereum is a transformative process that breathes new life into the token. To wrap Ethereum, it’s necessary to lock it in a smart contract, which then mints an equivalent number of coins.

To Burn Wrapped Ethereum, The Same Process Is Followed, But in Reverse

Wrapped Ethereum represents the exact value of Ethereum, being pegged 1:1 to the price of the cryptocurrency. You can deposit coins from your Ethereum wallet and receive wrapped Ethereum in your Bitcoin wallet. Wrapped Ethereum is created and destroyed via a process called minting and burning. Minting is the process of generating new coins, making them legal tender and injecting them into circulation. As mentioned previously, a smart contract mints a wrapped Ethereum token backed by the Ethereum token submitted for the transaction. In other words, the underlying asset is sent to a custodian who stores the Ethereum in a digital vault.

Whenever wrapped Ethereum is exchanged back into Ethereum, the exchanged token is burnt or removed from circulation. Once the coin is removed from circulation, the equivalent amount of Ethereum is released from the digital vault and brought instantly to the market. Burning basically involves unwrapping Ethereum; the value of the original coin can be unwrapped at any time. Unwrapping Ethereum is a pretty straightforward process. Go to the cryptocurrency exchange of your choice, connect your Ethereum wallet, select Unwrap from the top-down menu, enter the desired amount, and wait for the transaction to be finalized.

Ether Isn’t An ERC-20 Token, Just So You Know

Ether is the native cryptocurrency of the Ethereum blockchain. It’s the payment method in the Ethereum Virtual Machine, used to reward network participants for the expenses they incur for securing the network and validating transactions. Attention must be paid to the fact that Ether isn’t an ERC-20 token. It’s the only asset on Ethereum that isn’t created and managed by a smart contract. ERC-20 tokens are separate digital assets created on the Ethereum blockchain. Interacting with these coins requires the use of Ethereum. As opposed to Ether, wrapped Ethereum can’t be used to pay for gas fees on the network, but it can be used to buy and sell through auctions.

To shed some light on the matter, ERC-20 is a technical standard used for smart contracts on the Ethereum blockchain. It allows developers to build token applications that are compatible with other products and services, so it’s no longer necessary to build custom bridges between platforms to sustain the exchange of any token. The functions and events that must be implemented in a smart contract for it to be compliant were established by Fabian Vogelsteller. Wrapped Ethereum is ERC-20 compliant, meaning it can be deployed to interact with other ERC-20 assets, not to mention that it’s useful in providing liquidity to decentralized exchanges and other platforms.

The critical role of wrapped Ethereum is to serve as a bridge between Ether and ERC-20 tokens, so ensure your wallet is funded. Some dApps can’t work with Ether as collateral, so only wrapped Ethereum can be swapped for ERC-20 tokens on public blockchains. This compatibility streamlines token exchanges and improves the overall trading experience for users. Wrapped Ethereum also plays an important role in decentralized lending and borrowing platforms, as users can take advantage of the value of their assets while also maintaining a token format compatible with various DeFi protocols.

Finally, yet importantly, wrapped Ethereum can be used with yield farming and staking platforms to earn rewards, therefore creating passive income opportunities for cryptocurrency enthusiasts. Yield farming provides better returns but involves higher risks due to price fluctuations, protocol glitches, and impermanent loss, to name a few. Staking offers the flexibility to sell, transfer, and use wrapped Ethereum. Nevertheless, the amount of your balance isn’t consistent, changing daily as staking rewards come in.