Macauley Peterson


<p>Crypto pros like to have a laugh, sometimes at neophytes’ expense. But when the joke is obscure enough — in this case wrapped ether memes — it can have real consequences.</p>



<p>Over the weekend, crypto Twitter was alight with riffs on the <a href="https://blockworks.co/tag/bankruptcy" target="_blank" rel="noreferrer noopener">wave of insolvencies</a> that have plagued the industry, by pretending that wrapped ether (WETH) was somehow a risk to Ethereum. Spoiler: It’s not.</p>



<p>But when enough otherwise serious people pile on to a meme, it can metastasize into market-moving “news.” For instance, Gnosis co-founder Martin Koeppelmann joined in the fun on Sunday.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">As ETH gets constantly burned wrapped ETH (WETH) is no longer fully backed by it. We might see a bank run on redeeming WETH soon.</p>&mdash; Martin Köppelmann 🇺🇦 (@koeppelmann) <a href="https://twitter.com/koeppelmann/status/1596862942750085127?ref_src=twsrc%5Etfw">November 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>For crypto natives with an understanding of WETH and how ether is burned <a href="https://blockworks.co/tag/eip-1559" target="_blank" rel="noreferrer noopener">post-EIP-1559</a>,<strong> </strong>the joke is fairly obvious.</p>



<p>To review: WETH is an ERC-20 version of ether that can be used in smart contracts like Uniswap. It <a href="https://blog.0xproject.com/canonical-weth-a9aa7d0279dd" target="_blank" rel="noreferrer noopener">dates back to 2017</a> and is not in any way like a custodial version of ether. For all intents and purposes, it <strong>is</strong> ether. As such, there’s no connection between WETH and fluctuations in the ETH burn rate due to transaction fees. Ether used as WETH is not being burned and cannot depeg.</p>



<p>But the joke got out of hand. Even quality crypto sources like Bloomberg were taken in. Bloomberg <a href="https://archive.ph/H4XKI" target="_blank" rel="noreferrer noopener">reported</a> that “crypto watchers also pointed to worries about wrapped Ether, which is meant to have the same value as Ether while allowing access to more applications,” with the caveat merely that “some reports suggested the concerns stemmed from joke Twitter posts.” (They later <a href="https://www.bloomberg.com/news/articles/2022-11-28/bitcoin-drops-as-tremors-from-china-unrest-spook-global-markets" target="_blank" rel="noreferrer noopener">quietly removed</a> the offending paragraphs.)</p>



<p>In fact, there were no actual worries. It was 100 percent a joke from the start.</p>



<p>Dankrad Feist, a researcher at the Ethereum Foundation — the upcoming EIP-4844, also known as “<a href="https://notes.ethereum.org/@vbuterin/proto_danksharding_faq" target="_blank" rel="noreferrer noopener">Proto-Danksharding</a>,” is partially named after him — found the Bloomberg fracas <a href="https://twitter.com/dankrad/status/1597252241962209280" target="_blank" rel="noreferrer noopener">a bit off-putting</a>.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">A lot of people making jokes about WETH.<br><br>Please be aware it may not be obvious to outsiders that it&#39;s completely different from bridged assets and there is literally almost zero risk. I think it would be better to mark these more clearly as jokes.</p>&mdash; Dankrad Feist (@dankrad) <a href="https://twitter.com/dankrad/status/1596864596421189632?ref_src=twsrc%5Etfw">November 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>Koeppelmann <a href="https://twitter.com/koeppelmann/status/1597203104273166337" target="_blank" rel="noreferrer noopener">also came clean</a>, explaining the joke and why it made no literal sense in the first place.</p>



<p>To be abundantly clear: WETH is <a href="https://twitter.com/iamDCinvestor/status/1597184547875016705" target="_blank" rel="noreferrer noopener">unruggable</a>. It’s <a href="https://twitter.com/TimBeiko/status/1597263129695879170" target="_blank" rel="noreferrer noopener">not like wBTC</a> — wrapped bitcoin on Ethereum, which relies on <a href="https://wbtc.network/dashboard/audit" target="_blank" rel="noreferrer noopener">a central custodian, BitGo</a>, although there are plenty of <a href="https://twitter.com/mikebelshe/status/1596208748187353088" target="_blank" rel="noreferrer noopener">misconceptions</a> around the safety of wBTC as well. WETH can always be unwrapped to ETH on a one-to-one basis, as sure as the Ethereum network itself — it&#8217;s baked into the immutable code and there is no counterparty.</p>



<h3 class="wp-block-heading"><strong>Staked ether withdrawals are the top priority</strong></h3>



<p>This one was less of a meme and more of a misunderstanding, but also one propagated by <a href="https://twitter.com/CryptoCrystal_B/status/1592678358718255104" target="_blank" rel="noreferrer noopener">random folks on Twitter</a>. The “concern” was that somehow the withdrawal of staked ether planned in the next major Ethereum upgrade, known as Shanghai, has been delayed.</p>



<p>That was news to Ethereum developers, such as Prysmatic Labs’ Terence Tsao, developer of the leading Ethereum proof-of-stake consensus implementation, Prysm, who <a href="https://twitter.com/terencechain/status/1595822304822530051" target="_blank" rel="noreferrer noopener">tweeted</a> that “withdrawal remains the highest priority for Prysm.”</p>



<p>“As core devs, our biggest responsibility today is to enable stakers to withdraw their funds as fast and as securely as possible,” he said.</p>



<p>The Shanghai upgrade is expected to take place roughly six months after the Merge, or around the second quarter of 2023. Some pointed to a change in the Ethereum Foundation website regarding the timeline, but the Ethereum Foundation isn’t in the business of specifying dates because they don’t control Ethereum — its development is decentralized.</p>



<p>The best way to keep tabs on what’s actually happening with Shanghai is to follow <a href="https://github.com/ethereum/pm/issues/450" target="_blank" rel="noreferrer noopener">its progress on GitHub</a> or tune into <a href="https://github.com/ethereum/pm#previous-meetings" target="_blank" rel="noreferrer noopener">Ethereum core developer calls</a> — the latest was on Nov. 24, and was <a href="https://twitter.com/TimBeiko/status/1595860968298672128" target="_blank" rel="noreferrer noopener">summarized by Tim Beiko</a>.</p>



<p>Once again, beware the memes — some observers took the opportunity to turn the entire concept of staked ether into a joke.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">hearing rumors that ethereum is insolvent, withdrawals are disabled for all staked eth</p>&mdash; foobar (@0xfoobar) <a href="https://twitter.com/0xfoobar/status/1592403855572025344?ref_src=twsrc%5Etfw">November 15, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>Withdrawals are disabled by design until the Shanghai upgrade — this is neither new nor remotely alarming.</p>



<p>The moral of the story: <a href="https://twitter.com/Fullbeerbottle/status/1597068972653805568" target="_blank" rel="noreferrer noopener">Crypto memes happen fast</a>. If you don’t stop to look around once in a while — or, say, are celebrating Thanksgiving weekend with your family — <a href="https://youtu.be/vsYBtfQ3QDo?t=9" target="_blank" rel="noreferrer noopener">you could miss it</a>.</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha in your inbox. Think like an analyst. </li>
</ul>


Ethereum

WETH FUD Is All a Joke, ETH Withdrawals Still a Priority

John Gilbert

<div id="highlights-block_62a7ad30cd549" class="highlights">
        <ul>
                <li>Wrapped crypto tokens are smart contracts representing locked collateral of the original asset on a separate blockchain</li>
                <li>They provide liquidity to a growing DeFi ecosystem</li>
            </ul>
    
</div>



<p>Wrapped crypto tokens such as wrapped bitcoin (wBTC) are smart contracts representing locked collateral of the original asset (i.e., BTC) on a separate blockchain. They are used to provide liquidity to a growing DeFi ecosystem.&nbsp;</p>



<p>Think of wrapped bitcoin like an IOU briefcase. But instead of paper representing a promise to pay your BTC back, inside is a live feed to a vault containing every bitcoin and outstanding wrapped bitcoin.&nbsp;</p>



<h4 class="wp-block-heading"><strong>Quick facts</strong></h4>



<ul class="wp-block-list"><li>DeFi needs cross-chain liquidity for global adoption.</li><li>Wrapped tokens offer a solution.&nbsp;</li><li>The mechanism of wrapping a crypto token requires 3 parties: merchant, custodian and investor.</li><li>Wrapped tokens carry inherent liquidity- and market-contagion risks.&nbsp;</li><li>The value of wrapped tokens is not necessarily equal to that of their original counterparts.</li></ul>



<h3 class="wp-block-heading">Why wrapped tokens are important to DeFi</h3>



<p>Wrapped tokens offer a solution to a critical problem in DeFi: cross-chain liquidity. Think of each blockchain and its native token as a silo. Demand for that specific token is contingent on the applications built on that network.</p>



<p>DeFi (decentralized finance) and its complex credit and lending ecosystem needs immediate settlement technology that works across all blockchains. Without this technology, blockchains can&#8217;t benefit from the entire industry&#8217;s growth.&nbsp;</p>



<p>Wrapped tokens break down those silos by offering native tokens utility outside their blockchain. This innovation unlocks a flood of capital efficiency that enables diverse investment instruments across most chains. </p>



<h3 class="wp-block-heading">How wrapped bitcoin works</h3>



<p>All users access wBTC through third-party merchants such as <a href="https://aave.com/" target="_blank" rel="noreferrer noopener">AAVE</a> and <a href="https://makerdao.com/en/" target="_blank" rel="noreferrer noopener">Maker</a>. When a user requests wBTC in exchange, the merchant takes their BTC and sends it to BitGo, a custodian managed by the <a href="https://wbtc.network/" target="_blank" rel="noreferrer noopener">wBTC DAO</a> (a <a href="https://cms.blockworks.co/the-investors-guide-to-daos/" target="_blank" rel="noreferrer noopener">decentralized autonomous organization</a>). </p>



<p>In the previous analogy, the vault containing every bitcoin and wrapped bitcoin represents the custodian. Once BitGo receives the bitcoin from the merchant, it then mints the equivalent in wBTC — an ERC-20 token on the Ethereum blockchain. This token is a smart contract representation, or IOU briefcase, of the original bitcoin. </p>



<p>The custodian then sends the wBTC to the merchant, where the user finalizes the transaction. Typically, there aren&#8217;t any merchant fees in this transfer because they only charge fees for exchanging wBTC for BTC. The user will be responsible for any gas fees used in transferring wBTC on the Ethereum blockchain.&nbsp;</p>



<p>Because this exchange requires trust from multiple parties, BitGo partnered with Chainlink to provide an automated auditing system — similar to the direct live feed from the previous analogy. This auditing system is called <a href="https://www.bitgo.com/newsroom/press-releases/bitgo-adopts-chainlink-enable-on-chain-auditing-for-wbtc">proof of reserve</a>.</p>



<p>Other dApps (decentralized applications) in the Ethereum ecosystem use this protocol to monitor BitGo&#8217;s balance sheet when accepting wBTC as collateral or exchange equivalency. If BitGo were to mint more wBTC than the BTC it holds in reserve, every application using Chainlink&#8217;s protocol would stop receiving wBTC.</p>



<h3 class="wp-block-heading">What is the difference between a pegged and wrapped token?</h3>



<p>The value of a pegged token or currency can be linked to that of another asset — digital or physical — using a variety of approaches. Because custodians link wrapped tokens to the value of other crypto assets, they fall under the pegged currency classification.&nbsp;&nbsp;</p>



<p>But they do not classify stablecoins such as USDT as a wrapped token because it pegs its value to the US dollar in off-chain cash reserves. And unlike wrapped tokens, these reserves are not audited through an automated protocol.&nbsp;</p>



<h3 class="wp-block-heading">Is a wrapped token fundamentally the same as the original?</h3>



<p>No: wBTC should not be considered a fundamental equivalent to BTC. This common misconception is why many lose money in liquidation crisis events. In the analogy, the value of the briefcase IOU depends on three things: the quality of the livesteam and the integrity of the vault and the briefcase holding it together. </p>



<p>Wrapped tokens, in this way, require three layers of trust that the original token doesn&#8217;t need. So, it may seem that the two have the equivalent value for a time. But in bearish markets, the perceived value of the wrapped tokens can drop faster than that of the originals. This is how wrapped tokens can lose their peg even though their balance is still 1:1.</p>



<h3 class="wp-block-heading">The market-contagion risk of wrapped tokens&nbsp;</h3>



<p>A crypto market contagion is a financial crisis spreading from one protocol or crypto sector to another. Contagion is more likely when participants distribute credit risks across institutions and markets.&nbsp;</p>



<p>So with wrapped crypto, increased capital efficiency also comes with an increased risk of contagion. For example, if one protocol managing collateral vaults fails, every other application using their wrapped token or &#8216;IOU briefcase&#8217; is exposed to a potential liquidity crisis. This type of credit contagion has happened multiple times throughout the crypto cycles. They have been mainly associated with the collateral requirement failures of pegged stablecoins such as USDT and UST. Despite these previous episodes, we have yet to see a failure of a wrapped token vault audited by a proof-of-reserve protocol.</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha in your inbox. Think like an analyst. </li>
</ul>


wETH