How it works

Mirrored Assets

In Counterfactual, assets are mirrored rather than bridged, which entails delivering only the minimal cross-chain message containing balance information to the omni layer on L2s, while the actual assets remain securely locked on L1 to accrue yield. This methodology offers distinct advantages over traditional asset bridging.

Elimination of Centralized Asset Mapping/Whitelisting

Conventional bridging mechanisms require centralized teams to map or whitelist assets between chains, enabling user transfers.

Counterfactual, however, eliminates the need for such processes. Any ERC20 token can be mirrored without requiring prior permission, thus enhancing decentralization and operational flexibility.

Absence of Pre-Required Liquidity on Both Chains

Bridging typically involves locking tokens on the source chain and unlocking equivalent tokens on the destination chain, thus necessitating pre-existing liquidity on the destination chain, which can lead to inefficiencies as liquidity remains idle.

Counterfactual bypasses this requirement, allowing users to mirror an unlimited amount of assets from L1 to L2 without any liquidity constraints. From the moment assets are mirrored, they start accruing yield on L1, ensuring 100% capital efficiency.

Avoidance of Asset/Liquidity Fragmentation

Bridging often results in tokens with the same origin but different names and addresses on L2s (e.g., USDC and USDC.e), leading to user confusion and liquidity fragmentation.

Counterfactual maintains uniform token names, symbols, and addresses post-mirroring, thereby preventing any fragmentation and ensuring a seamless user experience.

Accrued Balances

When Layer 1 assets like ETH or ERC20 tokens are mirrored, they are employed in staking activities to earn yield through participation in proof-of-stake protocols or by lending to accrue interest. These activities are carefully orchestrated to maximize returns while ensuring security, thereby increasing the economic utility of the assets.

Mirrored assets can be converted back to L1 at any time without restrictions. The longer the assets remain mirrored, the greater the yield accumulated. On L2, the global vault records only the user’s share information instead of their exact balance, enabling assets to effectively rebase automatically with each block. This mechanism enhances capital efficiency even before the assets are unmirrored.

Counterfactual Execution

Counterfactual achieves efficiency by recording only the opening and closing transactions on the blockchain, similar to state channels. This approach validates each intermediary transaction off-chain using digital signatures, thus saving fees and time. For instance, in a series of transactions between Alice and Bob, they track their activities privately and only submit the final state to the blockchain for arbitration or conclusion, reflecting the net outcomes of their interactions.

While your assets are mirrored, you can leverage any DeFi protocol on Counterfactual, benefiting from the low gas fees and fast confirmation times characteristic of L2s. This model benefits high-frequency trading or other L2 operations requiring quick transaction times and lower fees, improving user experience by integrating earning opportunities seamlessly across both layers, thus offering a sophisticated financial infrastructure for modern investors.

We refer to the operations conducted on Layer 2 as “counterfactual executions.” When operating solely on Layer 1, only events occurring within that layer are visible. However, the actual computations and transactions take place on Layer 2, even though they may not be immediately apparent on Layer 1. This gives rise to the term “counterfactual executions,” as these operations effectively occur outside the observable scope of Layer 1, yet are integral to the system’s functionality.

By the way, protocols on Counterfactual differ from those on L1 in one key aspect: they do not transfer ERC20 balances directly. Instead, they interact with a global vault contract, which tracks all user token balances being mirrored.

Cross-L2 State Synchronizing

Details not disclosed yet.