Key learning points
- Crypto Twitter shared jokes about wETH being exploited or losing its link.
- At least one media publication – Bloomberg – took the jokes for granted.
- Wrapped Ethereum has no custodian and poses no systemic threat to the Ethereum ecosystem.
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Over the weekend, fears circulated in the crypto community stemming from claims that Wrapped Ethereum tokens could risk losing their 1:1 value against ETH. However, the claims are little more than elaborate jokes about recent contagion fears.
Packaged Ethereum jokes
Crypto Twitter has indulged in jokes about the state of Wrapped Ethereum over the past 24 hours, but not everyone is in on the act.
Many prominent crypto community figures including Hsaka, bantegAnd CL, recently shared increasingly brazen claims about the Ethereum Network’s Wrapped Ethereum Token (wETH) being depegged or exploited in some way.
“wETH hack has gone undetected since 2019,” stated banteg, lead developer of the pseudonymous Yearn Finance, “after examining over 90 million deposit and withdrawal events, I found a discrepancy between the total delivery of wETH contract reports and the actual outstanding wETH.” He then posted: “It appears the contract has 1 whey more than it is due. How is it possible?”
wETH is a token that aims to stay at 1:1 parity with ETH; it is used in many smart contracts and on non-Ethereum blockchains. Given that the token is widely used in various crypto ecosystems, it would be easy to believe that a failure would have catastrophic consequences for the crypto space.
At least one newspaper organization took the claims at face value. Bloomberg posted an article early this morning to report that crypto analysts had “concerns” about Wrapped Ethereum. The article was quickly edited when members of the crypto community began mockingly sharing it on Twitter.
understand LAW
Wrapped Ethereum is not issued by a centralized party, such as Circle or Tether, but by various smart contracts. Ethereum users can manually “wrap” their ETH by placing it in the smart contract and receive the same amount of wETH in return. They can then exchange their wETH for ETH at any time. Many different protocols and platforms offer to package ETH into wETH, including Open sea.
The advantage of wETH is that it is an ERC-20 token, just like other coins in the Ethereum ecosystem, for example UNI, MKR or LDO. Therefore, it has the same characteristics as these tokens and smart contracts can process ETH in the same way as any other ERC-20 token without the need for any technical adjustments.
Since wETH does not have any custodian (again, unlike USDC or USDT), the token itself does not pose any systemic risk to the crypto space. However, it is theoretically possible for some wETH tokens to lose value if their particular custodian loses the ETH backing the wrapped token.
The crypto space has been rife with rumors of systemic risk since leading crypto exchange FTX spectacularly collapsed in a matter of days in early November. The event sparked a chain reaction of insolvencies across several entities connected to FTX in some way, including BlockFi, Voyager, Genesis, and Digital Currency Group. But concerns about wETH losing its link or being exploited can be framed as yet another expression of the crypto community’s typical gallows humor.
Disclaimer: At the time of writing, the author of this piece owned BTC, ETH, and several other crypto assets.