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ETH, Ethereum, Wrapped Token

Main Takeaways

What’s the Difference? Which to use? And how do you switch between them?
If you’ve been using decentralized exchanges or DeFi apps, you’ve probably run across the term, “wrapped ETH” or “WETH.” You may have even been told that you need to “wrap” your ETH before using it in a DeFi application.
But what in the world is wrapped ETH? And why would ETH need to be wrapped in the first place?
Never fear. In this article

  • We’re going to explain exactly what wrapped Ether or WETH is
  • Why it sometimes needs to be used
  • How you can wrap or unwrap your ETH if you need to
  • What the tax situation with WETH is

TL;DR

  • 1 WETH always backed by 1 Ether, making it equally valuable
  • WETH is sometimes needed for smart contracts to handle the Ether better
  • You can wrap and unwrap ETH on Uniswap and follow our tutorial with screenshots
  • Tax laws are uncertain. We provided arguments for the different taxation views

 


Wrapped Ether vs ETH (WETH vs ETH)

Let’s start with a basic definition of “ETH” and “WETH.”
Ether (ETH) is the primary cryptocurrency or “native coin” of the Ethereum network. ETH can be used to pay transaction fees on the Ethereum network, whereas no other coin on the network (including WETH) can be used for this purpose.

ETH vs tokens

There are a few important differences between ETH and tokens like USDC, BAT, or DAI. For example, when you send ETH to a smart contract, the contract can recognize and respond to the payment. This is because every transaction has a “value” field that indicates how much ETH is being sent in it.
By contrast, a contract doesn’t know if you send it tokens. For example, if you manually send US Dollar Coin (USDC) to the Uniswap contract, you will most likely lose your coins forever. This is because the contract has no way of knowing that you sent it USDC.
To get around this problem, if you are trying to swap one token for another, decentralized exchanges (DEXs) will require you to first push an “approve” button that approves the exchange to move your tokens from your wallet to itself. Then, they’ll make you push a second “swap” button that instructs the exchange to go ahead and make the transfer.
By contrast, if you are swapping ETH for a token, you don’t need to push an “approve” button — because you don’t need to authorize the DEX to transfer your ETH to itself. Instead, you can just send the ETH to the contract.
Because of this fundamental difference between ETH and tokens, DEX programmers have to write several functions to allow people to swap ETH for tokens, tokens for ETH, or tokens for tokens. This increases the complexity of the app itself.
As we will explain in a later section, this problem can make apps unnecessarily complex, which is why Wrapped ETH is sometimes needed.

What is a WETH?

So, what is WETH in crypto? WETH is a token, just like USDC, BAT, DAI, SHIB, or any of the other thousands of tokens that exist on the Ethereum network. You can’t use it to pay transaction fees, and you can’t send it to a contract directly (or at least, you shouldn’t).
If you want to send WETH to a DEX, DeFi app, or other contract, you have to first call the “approve” function on the WETH contract, just like you do with any other token. So WETH is just an ordinary token that works like all the rest of them.
However, the one thing that makes WETH unique is that it is “backed” by ETH. So, its value should also always be almost the same as ETH.
When you mint a new WETH token, you have to send 1 ETH to the WETH contract. And to get your 1 ETH back out of the contract, you need to allow the WETH contract to take your 1 WETH back and destroy it.
In this way, the WETH contract helps to make sure that the value of WETH never strays far from the value of ETH.
Now let’s move on to a common question that is asked about wrapped ETH: is WETH the same as ETH?

Is Wrapped ETH the Same as ETH?

If you’ve read this far, you’ve probably realized the difference between ETH and WETH and realized they are not the same.
ETH is the native coin of the Ethereum network. It’s the coin used to pay transaction fees, and the ability to send it is built into the way the network works.
But WETH is a token produced by a contract. The WETH contract keeps track of everyone’s WETH balances and makes sure they can’t spend more WETH than they have. But there is no such thing as an “ETH contract” because the Ethereum software itself keeps track of everyone’s ETH balances.
Still, there is a connection between ETH and WETH in this sense: every WETH coin is backed by 1 ETH. So under normal circumstances, the price of 1 WETH should be about the same as the price of 1 WETH.
So, this is the difference between WETH and ETH.
But why is there both a WETH token and ETH itself? Why not just stick with ETH and not use WETH at all?

What is the Point of Wrapped Ethereum?

If you haven’t thought much about how smart contracts work, it might not be obvious why there is any need for Wrapped Ethereum at all. Could we just get by with ETH itself and never use Wrapped ETH?
The answer is: well, yes and no. Theoretically, programmers could simply write multiple versions of every single function in their DeFi apps. Each function would have at least two versions: one for ETH and one for tokens. Some functions would even need three or more versions, depending on whether the user was swapping ETH for tokens, tokens for ETH, or tokens for tokens.
In fact, this is precisely what most DEXs do. On Uniswap, Kyberswap, Pancakeswap, and many other DEXs, you don’t have to wrap your ETH to use it. Instead, if you use ETH in one of these apps, it just calls a different, “ETH-only” version of the function.
But solving the problem in this way can only go so far. Ultimately, writing different versions of every function can make the code more complex than it needs to be. This may lead to higher gas costs, bugs, or even exploits that can allow the app to be hacked.
To avoid this issue, many complex DeFi apps require users to wrap their ETH before using it in the app. So, that is why you might not want to use ETH vs. WETH
By the way: Wrapped Ethereum was created by the MakerDAO team. It was based on a prototype called “EtherToken.sol,” which was first developed by Stefan D. George of Gnosis. If you’re curious, you can explore the whole WETH contract on Etherscan.
Now let’s get to the most important question about ETH and WETH: is there a price difference?

Is There a Price Difference Between ETH and WETH?

Given that ETH and WETH are two different things, you may wonder if there is a price difference between them.
The answer is: there certainly can be a difference in price between ETH and WETH. However, the difference is usually small. In most cases, there is less than 10 cents per coin difference between them.

Wallet investor shows 1 WETH currently can be exchanged for 1.000692 ETH

The price of WETH expressed in ETH, at the time we were writing this section, according to walletinvestor.com.

WETH price arbitrage

The price of WETH is kept close to the price of ETH through an arbitrage process. If the price of WETH becomes much greater than ETH, traders will mint new WETH by depositing ETH into the contract. Then they will sell the WETH for ETH and repeat the process, profiting all the way. This selling pressure will tend to push down the price of WETH. At the same time because so many people will be locking up ETH to get WETH, the supply of ETH in DEXs will fall, pushing up the price of ETH. This will continue until both coins are about equal in price again.
On the other hand, if the price of WETH becomes much lower than ETH, traders will buy up WETH and redeem it to get ETH out of the contract. Then they’ll sell the ETH and repeat the process. This selling pressure for ETH will push down its price, and as WETH is destroyed to release ETH, WETH’s supply will fall and its price will go up.
Keep in mind though that we are describing normal market conditions here. In a “black swan” event or any kind of catastrophic market meltdown, the price of WETH could diverge greatly from that of ETH.
On the other hand, you can always redeem WETH for ETH directly in the contract, bypassing the market entirely. So in most circumstances, it won’t matter what the price is.
Still, bugs or exploits could be found in the WETH contract at some point. So it’s always a good idea to not invest more in WETH (or in any cryptocurrency) than you can afford to lose.
Now here is how to redeem Wrapped ETH for the ETH backing it.

Can You Convert Wrapped ETH to ETH?

You may be reading this article because you’ve received some Wrapped ETH and are wondering if you can convert it into regular ETH.
Yes, you can get ETH vs. Wrapped ETH. Uniswap has a handy interface that you can use to call the “withdraw” function on the WETH contract and get the ETH you are owed. We’ll now explain how to use this interface.
In this tutorial, we’ll assume that you’re using Metamask as a wallet. But these steps also work with Coinbase Wallet and WalletConnect.
Here is how to convert Wrapped ETH into ETH simply and easily.

  • Open your browser and navigate to https://app.uniswap.org/#/swap.
  • Click the connect wallet button, and select your wallet from the list.
  • Unlock your wallet with your password (if necessary), and then confirm the connection in your walletA Metamask dialoge shows up in which you can connect your wallet
  • You should see a coin selector box in the middle of the screen, and your ETH balance should be displayedThe default Uniswap swap dialog
  • Where it says “ETH,” click to show a list of coins

The Uniswap dialog for token selection

  • Select “Wrapped Ether” or “WETH.” You should now see WETH at the top and “select token” at the bottom
  • Now click “select token,” and select “ETH.” At this point, you should see “WETH” at the top and “ETH” at the bottomUniswap swap dialog wtih WETH to ETH selected
  • If you made a mistake and ended up with “WETH” at the bottom and “ETH” at the top, just click the arrow button in the middle to flip the two coins into the opposite positions
  • Enter the amount of Wrapped ETH you want to redeem or the amount of ETH you wish to receive in the appropriate box
  • Now click “unwrap.” A Metamask confirmation window will pop up. You’ll be able to see that it’s calling the Wrapped Ether contract instead of the Uniswap onesThe Metamask popup for confirming the Uniswap unwrap WETH transaction
  • Click the “Confirm”-button in Metamask to sign the transaction and receive the ETH you’re entitled to

That’s all there is to “unwrapping” or redeeming WETH.
But what if you have ETH and want WETH? In the next section, we’ll explain how to wrap your ETH for use in a DeFi app.

How Can You Wrap ETH?

The process of how to get Wrapped ETH (or how to wrap ETH) is almost the same as how to unwrap it, except in reverse.
Here is how to wrap your ETH using Metamask and Uniswap.

  • Navigate to the URL for the Uniswap app: https://app.uniswap.org/#/swap.
  • Click the connect wallet button below the selector box or in the upper-right
  • Choose “Metamask” from the list, and confirm the connection in your wallet
  • Where it says “select token,” click to bring up a list of coins
  • Choose “WETH” from the list. You should now see “ETH” at the top and “WETH” at the bottom
  • If WETH is at the top instead of the bottom, push the arrow key in the middle to switch them
  • Enter the amount of ETH you want to wrap at the top or the amount of WETH you want to receive at the bottom
  • Push the wrap button, and confirm the transaction in Metamask. Note that this transaction uses the Wrapped ETH smart contract instead of the Uniswap ones
  • Once the transaction confirms on the network, you should receive your newly minted WETH

Now that you know how to wrap and unwrap ETH, you may wonder if it costs gas or if it’s a taxable event. The next two sections will discuss these issues.

Does Wrapping ETH Cost Gas?

If the Ethereum blockchain is extremely congested, transaction fees or “gas fees” can get very high. You may not want to perform the extra transaction for wrapped vs unwrapped ETH if it costs a gas fee.
Unfortunately, wrapping ETH is a transaction on the network, so it does cost gas. Luckily, it isn’t a very complex transaction, which makes it not as costly as many other DeFi transactions.
Still, it can’t be done for free. Keep this in mind when you are considering whether to wrap your ETH.

Is Wrapped ETH Taxable?

One question that often comes up is whether wrapping ETH or unwrapping it are taxable events. Is wrapping ETH an exchange of one good for another? If so, should you treat wrapping ETH as a “sale” and pay capital gains tax on it? Or if you are holding WETH and it goes up in value, should you pay capital gains tax based on its value when you unwrap it?
Or can you just wait until you swap the Wrapped ETH or ETH for cash, treating the two cryptocurrencies as essentially interchangeable?
Unfortunately, tax authorities have not answered this question definitively. So we can’t give you an official answer. But we have found some fairly authoritative answers for both Germany and the U.S.

Is Wrapping ETH a Taxable Event in Germany?

A German law firm named Winheller, Besteurerung & Steuerberater (“Winheller Taxation and Accounting”) has weighed in on a subject that is similar to this issue of wrapped tokens taxation.
In a post called “Wie Wird Liquidity Mining (DeFi) besteuert?” (“How is Liquidity Mining (DeFi) taxed?”) Winheller discusses the Liquidity Pool or “LP” tokens that are given to liquidity providers in DEXs as a claim check for the assets they put into the pools.
According to Winheller, these tokens cannot be seen as “goods” that are given in return for assets put into the pool. Instead, they should be seen as “receipts” or “entitlement certificates” that give the holder the right to the underlying asset. As a result, the conversion of LP tokens to their underlying assets or vice-versa shouldn’t be seen as taxable events.
If Winheller is right, the wrapping or unwrapping of ETH also shouldn’t be taxable.
However, keep in mind that this only applies if you’re using the Wrapped ETH contract to mint or redeem Wrapped ETH. If you’re actually swapping one for the other on an exchange, you could make a profit or loss from the trade. In that case, it might be considered a taxable event.
The tutorials shown above are not a “swap” in this sense because they do not use the uniswap contracts and because there is no other person on the other side of the “trade.”

Is Wrapping ETH a Taxable Event in the U.S.?

In the U.S., we haven’t found any legal firms that have commented on whether wrapping tokens is a taxable event. However, the developer of Koinly, a crypto tax accounting software, has argued that wrapping tokens is a taxable event in the U.S.
In a post titled “Are Wrapped Crypto Tokens Taxable?” Koinly gave this example:
“Of course, if you’re exchanging an asset that has significantly changed in value since the time you acquired it – you’ll have a significant loss or gain to record. For example, if you bought 1 BTC for $30,000 and then exchanged it for 1 WBTC when the FMV of BTC was $60,000 – you’d have a capital gain of $30,000 which would be subject to Capital Gains Tax.”
So maybe these events are taxable in the U.S.

The tax laws on wrapping ETH are still unclear in most countries

The opinions we’ve listed here represent a small subsection of the legal and accounting professions in Germany and the U.S., so none of this should be taken as tax advice. You may want to consult your tax attorneys before deciding whether to claim these events as taxable or not.
But these are the most authoritative answers we’ve found yet. So they represent the best answers so far to the question “Is Wrapped ETH Taxable?”
As more information becomes available, we’ll update this post with the latest opinions on how to handle this on tax returns.

Wrapping Up

If you’re new to DeFi, you may have been surprised at being asked to “wrap” your ETH. You may have wondered if there is any need for this, if WETH can be unwrapped, if the price of WETH can vary from ETH, and many other questions.
But now you know the answers to these questions. WETH was created to simplify the coding process, cut down on gas fees, and prevent bugs and exploits. Luckily, you can always redeem WETH for ETH by using the Wrapped ETH contract directly, instead of trying to “sell” your WETH for ETH on the open market.
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