Counterfactual: An Infrastructure for Resolving Liquidity Fragmentation through Synchronized L2 States

Counterfactual introduces a new way to build dApps that operate effortlessly across multiple chains in the Ethereum ecosystem, redefining cross-chain interoperability with efficient asset movement and data synchronization.

How? Dapps can still live on multiple L2s, but price ratios and total liquidity are shared across all instances on all chains. We call it: the Interstate Execution Layer (IEL).

Counterfactual is not another bridge and does not introduce a new cross-chain stadard for tokens. We believe that users prefer the security of holding assets on L1, but want to enjoy the benefits of L2s, which we achieve with: Asset Mirroring.

With Counterfactual, your tokens remain on L1 and a mirrored version is created on the L2 of your choice. The token addresses are identical on both chains. Also, unlike bridging, there are no amount caps on assets mirrored between L1 and L2s.

Why is this cool? By its design, the protocol has no down time or stuck funds because of a 100% utilization rate, which happens frequently on popular bridges. No other interoperability solution available can operate without your idly locked tokens to support it, until now.

By utilizing canonical assets across all transactions, Counterfactual removes the complexity and risk often associated with cross-chain movements. This means you can enjoy a more streamlined, cost-effective, and secure experience, where assets remain native to Ethereum but are accessible across multiple layers.

“Mirroring” means that canonical assets remain securely on L1, but are simultaneously represented on L2s with equivalent balances. However, you may trade, lend, stake mirrored tokens on L2 without affecting your L1 balances.

While mirroring, your L1 balance generates yield in real time from mature sources (i.e. AAVE, Maker, etc.). Unlike traditional bridges, where assets remain idle, every moment with Counterfactual actively contributes to your benefit.

It’s like having your cake and eating it too—your assets remain secure on L1, while your mirrored assets on L2 keep growing, offering an optimal way to manage your holdings.

Think of it as a supercharged version of Blast, but with far greater flexibility—user balances accrue in real time, not limited to just ETH or a single chain. Counterfactual offers support for any canonical ERC20 asset on Ethereum in a fully permissionless manner, allowing even newly created tokens to be mirrored without any limitation.

Furthermore, since your assets are securely kept on L1, even if a catastrophic failure or “doomsday event” were to occur on an L2, your assets remain completely safe and unaffected. This means you can take advantage of yield opportunities across multiple assets while still benefiting from the robust security of the Ethereum mainnet.

Traditionally, L1s are slow and expensive but hold canonical assets and offer deep liquidity, which supports more stable yield opportunities. In contrast, L2s are faster and cheaper but have scattered liquidity, which makes them less efficient.

Counterfactual changes this dynamic by combining the best aspects of both layers, effectively allowing users to enjoy the security and liquidity of L1 while taking advantage of the speed and efficiency of L2.

Instead of just seeing L2s as quicker, cheaper versions of L1, Counterfactual gives each layer a clear role. L1 is used mainly for handling deposits and withdrawals between L1 and L2, which are the only times when users face L1’s higher fees and slower processing times.

All other actions, like swaps, adding or removing liquidity, leveraging, and staking, take place on L2, where transaction fees are much lower and speeds are faster. This setup means that once users move their assets to L2, they can carry out their activities more quickly and affordably.

In this way, users get the security and stability of L1’s assets but can also enjoy the speed and low costs of L2, making transactions smooth and efficient by combining the best of both layers.

The Interstate Execution Layer (IEL) is the engine behind Counterfactual’s seamless cross-chain interactions. It unifies all supported L2s into a single execution layer, simplifying the architecture and making it easy for dApps to interact across multiple L2s. Developers no longer need to worry about synchronizing states across chains—the IEL handles it all automatically.

For users, this means you have the freedom to select which L2 you want to execute transactions on, without sacrificing efficiency or yield. The network is designed to offer a consistent experience, regardless of which L2 you choose, making cross-chain interaction as simple as it gets.

Is this a buzzword that lost its effect? Yes. Is this still a big deal though? YES.

The IEL merges L2s into one cohesive execution environment, allowing the total TPS to be the aggregate of all supported L2s combined. This means Counterfactual achieves a level of scalability that brings Ethereum’s vision of Sharding to life.

Ethereum’s sharding concept divides the blockchain into smaller shards, enabling parallel transaction processing to increase throughput, reduce congestion, and lower costs, all while preserving security and decentralization.

Counterfactual builds on this by leveraging L1 assets across an L2 execution layer, allowing multiple L2s to act as interconnected shards. This approach combines the strengths of L1 and L2 to create a scalable, high-speed infrastructure, delivering the seamless, yield-optimized experience that sharding aimed to achieve, but with immediate real-world applications.

The synchronization from Counterfactual’s Interstate Execution Layer (IEL) effectively consolidates liquidity from multiple L2s into a unified pool, ensuring that users can tap into the combined liquidity available across the entire network.

This interoperability means that dApps can tap into liquidity, assets, and data from multiple chains, creating a more dynamic, less fragmented multichain ecosystem.

The Interstate Execution Layer (IEL) regularly and automatically keeps all chains in sync, making sure the data is always accurate and up-to-date across different chains. This means the data stays consistent, even when it’s scattered across multiple chains, making cross-chain operations much more efficient.

For developers, this is a big advantage because they no longer need to worry about keeping data consistent across different chains.

For everyday users, this means you can choose any L2 that fits you best, whether it’s the one with the cheapest fees or the fastest transaction times. No matter which L2 you pick, your funds will have the same financial outcome, giving you a smooth and consistent experience. You can make transactions on the most cost-effective and fastest L2 without worrying about differences in results—everything stays perfectly in sync.

Counterfactual represents a pivotal evolution in Ethereum interoperability. Asset mirroring, state synchronization, and layer unification pave the way for a cross-chain future that maintains capital efficiency without compromise.

This allows for simultaneous processing across chains, merging the strengths of both L1 and L2 layers to provide an efficient, high-speed, and scalable infrastructure. As a result, it delivers the seamless, yield-optimized experience that Ethereum’s sharding was always meant to achieve, but with immediate real-world applications.