Layer 2

A layer 2 processes transactions off the main chain and periodically settles the results back to it. By doing most of the work elsewhere, it can offer far lower fees and higher throughput while still relying on the layer 1 as the final arbiter of what happened. The Lightning Network is Bitcoin's main layer 2. Ethereum has many, including Arbitrum, Optimism, Base, and zkSync.

Ethereum layer 2s are mostly rollups. They execute thousands of transactions, compress the data, and post it to Ethereum in a single batch. The cost of that batch is shared among all the transactions, so a swap that might cost 5 dollars on Ethereum mainnet costs a few cents on a rollup. Users bridge ETH or tokens to the layer 2, transact there, and can withdraw back at any time.

Layer 2s are not free of trade-offs. Most still rely on a single operator called a sequencer to order transactions, withdrawals from optimistic rollups take about a week, and liquidity is fragmented across many networks. Ethereum's March 2024 Dencun upgrade cut layer 2 costs sharply by giving rollups a cheaper way to post data.