From stETH to wETH to Gwei: Understanding the Different Shades of Ethereum

It's important to understand the difference between staked ether tokens and staked ether deposits and more so that you don’t make an expensive mistake.
Updated Jul 18, 2022 at 6:43 p.m. UTC
Crypto Explainer+

Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.

If you have been in crypto for a while, you might have heard of “sat,” short for satoshi, a tiny unit of bitcoin (BTC). Bitcoiners say they are “stacking the sats” when they buy bitcoin. Well, there's a version of that in Ethereum. It’s called gwei, a small unit of ethereum that’s used when talking about gas fees, or the network charges. But there are many other denominations beyond gwei, and indeed, many tokens associated with ether (ETH).

Then there are oddities like wrapped ether (wETH), which represents the same value as ETH but is a technically different version of it. And there are tokens that represent staked ether deposits, such as stETH.

If you can’t tell your gwei from wei or wETH from ETH, you may end up making a costly mistake. Millions of dollars are reportedly stuck on-chain as many users of the Coinbase trading platform try to deposit wETH to their Coinbase ETH addresses. In this guide, we break it all down.

What are gwei, wei and other Ethereum denominations?

Just like a U.S. dollar can be broken down into nickels and dimes, ether can also be denominated in smaller units.

The smallest ether denomination is called wei. It’s named after cryptographer Dai Wei, one of the early cypherpunks who proposed Bitcoin predecessor b-money in the 1990s. One wei is worth a quintillionth of one ETH. Put another way, one ETH is worth 1,000,000,000,000,000,000 wei.

All other denominations make reference to wei in their names, but you really don’t need to know most denominations because they are almost never used in any context. Let’s focus on those that matter.

Despite the seemingly infinitesimal value, wei is important because it’s a reference denomination sometimes used in smart contracts. In March 2022, one non-fungible token (NFT) investor lost $1 million when he listed an EtherRock NFT for 44 wei, instead of 44 ETH as he intended.

The most commonly used of all ETH denominations is gwei, which stands for giga wei. One gwei is worth a billion wei. It's popular because Ethereum’s transaction fees, called gas fees, are calculated in gwei. Instead of saying the Ethereum base gas cost is 0.00000001 ETH, it’s easier to say 10 gwei.

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Ethereum gas tracker (etherscan.io)

Other denominations include kwei (kilo wei) and mwei (million or mega wei). One kwei corresponds to one thousand (1,000) wei, and one mwei is one million (1,000,000) wei. They’re almost never used in practice.

What is wrapped ether (wETH)?

Odd as it may sound, Ethereum’s native token ether isn’t compliant with the blockchain’s most common token standard, which is known as ERC-20. The ERC-20 standard was proposed in 2015 and finally became the norm for fungible tokens, like USD coin (USDC) and maker (MKR), in 2017.

Decentralized apps on Ethereum typically work with ERC-20 tokens. Since ETH isn’t ERC-20 by design, it needs to be made compatible. The process by which ETH is converted to an ERC-20 is called “wrapping.” Unwrapping WETH means reversing the token back to its original state, the good old ETH.

On most platforms, such as decentralized exchange Uniswap, ETH is automatically converted to wETH in the background. But others require you to first wrap ETH yourself. These include NFT marketplace OpenSea (on which wETH is needed to make offers) and decentralized exchange aggregator CowSwap (where you will have to convert ETH to wETH before any trade).

WETH is tradable for ETH on a 1:1 basis at all times. You can wrap and unwrap ETH directly on decentralized exchanges or indirectly through the MetaMask browser extension. Remember that you will have to pay gas to wrap and unwrap your tokens.

What are stETH and other staked ETH tokens?

To stake ether, you will need 32 ETH. That’s a lot of ETH for one person, and so staking pools like Lido Finance let users combine their ETH and stake it with a validator. Centralized crypto exchanges like Binance also offer a similar service.

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Liquid staking total value locked rankings on July 1, 2022 (Defi Llama)

When you stake ETH with a service like this, you receive tokens that represent your staked ETH position. 1.5 stETH represents your initial deposit of 1.5 ETH.

Staked ether tokens and their issuers include:

  • aETHc (Ankr)
  • BETH (Binance)
  • rETH (Rocket Pool)
  • stETH (Lido Finance)

These tokens will be redeemable for ETH on a 1:1 basis after the Merge, a key milestone in the Ethereum blockchain's transition to proof-of-stake, is complete. The date of the Merge has yet to be determined, however. On top of the initial deposit, the tokens also represent a proportional share of the accrued staking rewards, which is about a 4% annual percentage rate.

But these tokens aren't necessarily tradable for ETH on a 1:1 basis prior to the Merge as their value is subject to natural market conditions, which we will get into next.

Is stETH pegged to the price of Ethereum?

Lido Finance’s stETH is the most popular token that represents staked ether deposits. Since its inception, stETH has traded as low as 0.92 per ETH and as high as 1.05 per ETH. Despite trading at around 1 per ETH during much of late 2021 and early 2022, stETH fell to a larger discount in mid-2022 after big wallets like the one that belonged to hedge fund Three Arrows Capital exited their stETH positions to raise liquidity.

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The stETH/ETH conversion rate (CoinMarketCap)

The mass sell-off during the 2022 crypto crash pushed down the price of stETH in proportion to ETH, leading some commentators to suggest that stETH might depeg from ETH. However, stETH isn’t pegged to ETH.

This is also true for other tokens that represent staked ETH positions, such as BETH or aETHc.

Why does the stETH trade at a discount to ether?

Even though stETH is the same as ETH over the long run and also comes with a claim on staking rewards, it still trades at a discount to ETH’s current market price. That’s mainly because the token is backed by time-locked ETH, a highly inflexible underlying asset that’s also subject to various risks.

The risks associated with stETH and the underlying locked ETH include:

  • Systemic risks (smart contract or validator)
  • The Merge execution risk (further delays, cancellation or other technical issues)
  • Less liquidity than ETH

One person’s risk, however, is another person’s opportunity. For investors with a big appetite for risk, stETH and other similar tokens represent an opportunity for buying ETH that’s only cheaper than the market price.

This article was originally published on Jul 7, 2022 at 2:56 p.m. UTC

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Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.

CoinDesk - Unknown

Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.


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