WETH depeg causes a stir on Crypto Twitter, but can it actually depeg?

The past few days, we have been bombarded with fears of multiple wrapped tokens getting depegged or trading at a value that is not 1:1 with its native token. The recent one that’s been making its rounds on Twitter is wrapped Ether (WETH), possibly depegging.

But can it actually depeg? Also, what is wrapped Ether (WETH)?

All you need to know about WETH

In our last market insights, we talked about wrapped Bitcoin (WBTC), which allows people to use BTC in decentralized applications on Ethereum, and how it works is that you would deposit BTC to a custodian, who would then give you wrapped Bitcoin in return — facilitated by a third-party, the merchant.

Wrapped Ether (WETH) works similarly to wrapped Bitcoin, with the major difference being that the only way you can get wrapped Ether is by either buying it on decentralized exchanges or the primary way: by interacting with a smart contract.

Specifically, this smart contract: Wrapped Ether

The only function of this contract is “Deposit” and “Withdraw”, and this is how it works:

1. Deposit: When you call the “Deposit” function, it allows the contract to decrease your ETH balance, and increase your WETH balance by the same amount. The ETH will then be held in the smart contract itself, which you can view publicly.
2. Withdraw: When you call the “Withdraw” function, this allows the contract to decrease the balance of your WETH, and increase your ETH balance.

This means that you are not putting your trust in merchants or custodians to keep your native Ethereum safe and locked away, unlike other wrapped assets, like wrapped Bitcoin (WBTC).

Can WETH depeg?

The short answer is no, WETH will not depeg.

The long answer, because WETH is a smart contract that you interact with and is open source, we know that there is no trust required for the funds to be backed 1:1 because there is no third party.

However, since the primary concern for people looking to use this contract is security, multiple experts and enthusiasts have audited this contract for bugs. And as far as we know, there have been no bugs or flaws that can be exploit the funds, thus making it safe to use.

Conclusion

To summarize, the threads and tweets that talk about wrapped Ether (WETH) depegging was a play on the fact that WETH is an ERC-20 token, and that it is impossible to go insolvent and will always be backed 1-to-1 by the ETH that was deposited by users — and many people have fallen for this joke, including some analysts, which was pretty interesting (sorry, Bloomberg you fell for it).

If you have been reading our articles, thank you, and please bookmark our website so you can get updated on situations like these and expand your knowledge on the whole cryptoverse!

Until then, stay safe.

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