Wrapped Ether (WETH) refers to the ERC-20
compatible version of ether (wrapping ether with other ERC standards is also possible). WETH can be created by sending ether to a smart contract
where the ether is placed on hold, in turn receiving the WETH ERC-20 token at a 1:1 ratio. This WETH can afterward be sent back into the same smart contract to be “unwrapped” or redeemed back for the original ether at a 1:1 ratio.
Ether, being the native currency on the Ethereum
blockchain, was created before the ERC-20 standard and others standards were implemented; hence ether itself is not ERC-20 compatible and cannot be exchanged directly for other ERC-20 tokens in a decentralized manner without the mediation of a trusted third party or the addition of complex technical implementations. Instead of implementing two interfaces (one for ether and another for ERC-20 tokens) within the same smart contract leading to unnecessary complexities, developers decided to “wrap” ether to upgrade it to the ERC-20 standard in order to conveniently handle WETH and other ERC-20’s within the same contract. Wrapping ether allows the direct, seamless exchange between ether and ERC-20 tokens without the need for a trusted third-party and without incurring in unnecessary risks such as unexpected errors during transactions resulting from complex implementations. Many Ethereum-based decentralized applications (dApps)
such as decentralized exchange
platforms use WETH in place of ether to facilitate the direct and decentralized peer to peer trading between ether in “wrapped form” and ERC-20 tokens under the same technical standard. Recent developments are trying to have a canonical WETH standard that could be used by all Ethereum-based dApps.