Liqudity crunch, insolvency, withdrawal freeze, depegging; these are just some of the trigger words striking fear into the heart of today’s crypto investor.
And for good reason, given these terms are attributable to the myriad of devastating collapses that have plagued the markets in 2022, from Celsius to FTX by way of Terra LUNA.
So it was with calculated malice that a few twits on Twitter began circulating a rumour that Wrapped Ethereum (wETH) had gone insolvent and depegged from ETH.
Industry figures including writer Anthony Sassal, Gnosis founder Martin Köppelmann, and even Tron founder Justin Sun joined in on the laugh.
For the seasoned crypto bro, this was an obvious joke: For reasons we’ll get into below, wETH cannot go insolvent.
But as the crypto influencer Richard Heart pointed out, the rumour could have placed less sophisticated users in financial trouble should they have taken the joke at face value.
There's a joke going around about #WETH depending from #ETH. All the big names are playing with it including vitalik. I am not because I don't think joking about things that could get the silliest of users rekt is funny. Thus my jokes suck a bit more, but save more lives.— Richard Heart (@RichardHeartWin) November 28, 2022
Thankfully, no amount of Twitter tomfoolery can cause wETH to collapse (probably), but to understand why, we first need to understand what wETH is.
What is Wrapped Ethereum (wETH)?
Wrapped Ethereum (wETH) is part of a family of cryptocurrencies called ‘wrapped tokens’, of which Wrapped Bitcoin (wBTC) is the largest and most widely used.
These wrapped tokens allow for interoperability across different blockchains. For instance, although bitcoin (BTC) is the world’s largest digital asset, it is only compatible with its own blockchain, rendering it useless on the Ethereum blockchain, or any other for the matter.
However, through the magic of a smart contract, users can convert their BTC into wBTC and voila, they can now interact with Ethereum using a synthetic version of their coins.
Once they’re done, wBTC can be converted back into the original BTC on a 1:1 basis. Since the smart contract will always hold exactly one bitcoin per wBTC, the price of wBTC remains pegged to BTC.
wETH works in the same way, but it gets slightly more confusing.
Although ether (ETH) is the native coin of the Ethereum blockchain, it is not actually compatible with Ethereum applications.
Therefore, ETH holders must convert their coins into wETH to use them on their favourite Ethereum-based applications, hence why wETH is so important to the Ethereum ecosystem.
Can wETH depeg?
wETH is not a company, nor is it a centralised entity- it is a bunch of code developed by a group of Ethereum developers in order to enable interoperability.
Since there is no truly centralised custodian, unlike Celsius, Terra LUNA or FTX, your ETH should always be redeemable as and when you want.
Or course, there is always a risk that the code could be exploited, but no such incident has yet to occur.
While it is true that wBTC recently depegged by 1%, the circumstances a slightly different.
wBTC uses a centralised custodian called BitGo, and the collapsed trading firm Alameda Research was the single largest wBTC merchant, having created more than 100,000 wBTC.
wBTC also maintains its peg with BTC via arbitrageurs who trade on small price fluctuations, similar to how algorithmic stablecoins work.
wBTC’s exposure to the toxicity of Alameda Research evidently spooked arbitrageurs away from the wrapped token.
As of November 28, wBTC was less than 0.01% below the value of BTC.