The WETH in danger? Spoiler: no – For several days, a FUD rages on Twitter regarding WETH from Ethereum. A simple joke for which many Internet users have fallen, by confusion with “wrapped” tokens.
FUD around the WETH
Over the weekend, WETH was the center of attention on Twitter. Indeed, several users have started posting about a potential WETH insolvency.
“WARNING: WETH is about to be insolvent. I will reluctantly bail out all WETH holders at a rate of 0.5 ETH per WETH in order to save this ecosystem. You can thank me once the crisis has been announced. »
In fact, this joke refers to the situation of uncertainty surrounding the WBTC token. Thus, this one plays on the difference between the two tokens, which both have the “W” suffix of “Wrapped” although they do not function in the same way at all.
Faced with the reactions of part of the community, several players in the ecosystem had to explain the bottom of the joke and why the WETH will never experience an insolvency crisis. This is particularly the case of Anthony Sassano who has declared :
“Reading the answers, I think I should clarify. There is nothing wrong with WETH and you can always trade 1 ETH for 1 WETH. »
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Why can’t WETH be insolvent?
How WBTC works
As we have just seen, this joke has its roots in the situation surrounding the WBTC. As a reminder, the WBTC is a tokenized version of BTC, allowing to use BTC on Ethereum. This token is issued by the company BitGowhich creates a WBTC for every BTC deposited on their service.
The situation of the token has deteriorated in the last few days, while the exchange rate between WBTC and BTC has moved away from the 1 to 1 ratio. This fall can be explained in particular by an uncertainty as to the many WBTCs held by the defunct FTX exchange platform.
The case of WETH
For his part, the WETH is quite different from WBTC. In practice, WETH was created to facilitate trading on Ethereum. This is none other than a representation of ETH, in the form of an ERC-20 token.
Unlike the WBTC, this one is not issued by a central body. Indeed, the WETH is managed by a smart contract on Ethereum. This contract works in a very simple way, when a user deposits ETH, the contract returns the same amount in WETH.
Conversely, WETH can be converted back to ETH by sending WETH to the contract.
Therefore, with this model it is impossible for WETH to move away from its peg with ETH, because there is as much ETH held by the contract as WETH issued. The only possibility would lie in the presence of a loophole in the contract, an unlikely situation, because the contract is open-source and has already been audited many times.
So, although WBTC and WETH both have the “wrapped” suffix, they work in completely different ways. This is what Hudson Jameson pointed out in a thread explanatory:
“WETH is different from WBTC (wrapped BTC) or other “wrapped” assets which may not work the same way. In fact, some “wrapped” assets that are on chains other than Ethereum have centralized components that may be more susceptible to failure or loss of value. Be careful ! »
Via this joke, Internet users have highlighted an obvious confusion regarding the functioning of these two tokens.
This joke, however, highlights the need for greater transparency regarding centralized “wrapped” assets. However, the proofs of reservations are not so absolute as we might think and other methods need to be explored.
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