​“Issues” of wETH. How the joke went too far

Over the weekend, the crypto community on Twitter picked up on the joke theory that the “wrapped” Ethereum (wETH) tokens are on the verge of collapse. An impromptu flash mob, hardly understandable to the outside observer, involved top figures in the crypto industry, which provoked a notable market reaction.

Given the constant stream of news about the collapse of major industry companies, most recently BlockFi, rumors about possible bankruptcies of new players, hacks, and other problems, it is easy to get lost and believe in the failure of any crypto project without going into details and sources of information.

Not surprisingly, when fictional news about wETH’s “insolvency” started appearing en masse on social media, it looked realistic to many not heavily tech-savvy observers. At the same time, Ethereum lost about 5% in price on Sunday, November 27, and in discussions about what was happening it was admitted that partly rumors about the “collapse” of another project could provoke some investors to sell ETH.

“Analysts say some concerns”

A wave of ironic tweets began with claims that wETH tokens allegedly lose their peg to Ethereum. Arcane CIO Eric Wall tweeted about the depegging of the assets. Yearn Finance’s core developer under the nickname Banteg posted a series of tweets with fictionalized details about the 2019 wETH “hack.” In the publications, Banteg deliberately emphasized emotion by referring to absurd fictional evidence, obviously ironic about influencers in the crypto space.

It is worth noting that the jokes were often understandable to those with at least a minimal understanding of the technical side of Ethereum, and for the uninitiated, many of the published posts looked convincing. It went so far as to say that Bloomberg seriously wrote in an analytical article about why bitcoin’s price was falling that “analysts sat some concerns over wrapped Ether.”

The publication only increased the wave of new jokes and trolling. Anonymous Twitter users made posts introducing themselves as “CEO of The Wrapped Ethereum Foundation (WEF)” and found out which one of them had become the “analyst” the publication referred to. Finally, crypto billionaire Justin Sun said on his Twitter that together with his best friend Vitalik Buterin is launching a $2 billion fund to support WETH, which was picked up by some media and topic channels as real news.

As a humble member of the crypto industry, I personnally have discussed with my BFF @VitalikButerin and together we will invest $2b into WEF to recover all the funds. Stay #SAFU! Stay strong! https://t.co/UmjtljyRNz — H.E. Justin Sun🌞🇬🇩🇩🇲🔥 (@justinsuntron) November 28, 2022

The host of The Daily Gwei and well-known outspoken Ethereum supporter Anthony Sassano, who had also previously written that the ETH price is falling because of wETH’s insolvency, had to publish a clarifying post when he realized that the joke had gone too far.

What is wETH

The letter “W” stands for the word “wrapped.” When a token is “wrapped,” it is a fixed amount of another token, usually in a 1:1 ratio. The term “wrapping” is most commonly used to describe ways to transfer assets to another blockchain, such as when a “wrapped” BTC (wBTC) is created to transfer bitcoins to the Ethereum blockchain. In other words, it is a copy of an asset issued on another blockchain against the original token.

The ETH coin itself is not an ERC-20 standard token that DeFi applications work with, and “wrapped” ETH was invented to facilitate exchange within decentralized applications (such as exchanges or NFT marketplaces) as well as on other well-known blockchains (such as BNB Chain, Polygon, Near, Solana, and others).

Why wETH cannot “collapse”

The essence of jokes is that wETH cannot “collapse” or “become insolvent.” The issue of “wrapped” ETH uses a smart contract that locks a token that is available for a reverse transaction at any time. The procedure is transparent, and the presence of a locked token in the contract can be verified by most known blockchain explorers.

There can be no “insolvency” scenario here, since a locked token does not generate revenue and does not depend on the contracts of a particular DeFi project. Unlike stETH (“ether” in staking) or bridge protocols that allow tokens to be transferred between different blockchains, wETH has no centralized structure. These are the ones that often run into problems. The year 2022 was a record year for bridge hacks, from which hackers withdrew billions of dollars worth of assets.

Thus, wETH’s risk of “depegging” is effectively zero, even though wETH can sometimes trade at a slight discount to ETH. WETH has no problems, and the asset continues to perform as before.

According to Dune Analytics, there was a spike in the number of “deployments” of wETH, that is, the withdrawal of tokens from contracts for “wrapping,” during a period when the stream of Twitter jokes went truly viral. The market reaction showed how mass rumors of even technically impossible insolvency of some kind can be perceived as a signal for action or a growing panic, especially at a time of falling digital asset prices and the collapse of billion-dollar crypto companies.