Layer 2

A Layer 2 network inherits its security from an underlying Layer 1 chain, most commonly Ethereum, while handling the actual work of executing and ordering transactions somewhere else. Instead of every transfer or smart contract call competing for space in the base chain's blocks, activity moves to the Layer 2, and only compressed data or cryptographic proofs get posted back to the base chain for final settlement.

The dominant Layer 2 design today is the rollup. A rollup batches thousands of transactions, executes them off-chain, and submits the results to Layer 1 along with either a fraud-proof window (optimistic rollups, which assume transactions are valid unless challenged) or a cryptographic validity proof (zk-rollups, which prove correctness mathematically at the moment of submission). Older approaches include state channels, where two parties transact privately off-chain and only broadcast the opening and closing balance, and Bitcoin's Lightning Network, which uses a network of payment channels for near-instant, low-fee transfers.

Layer 2s exist because base chains trade off throughput for decentralization and security; rather than loosening those guarantees, most ecosystems push execution upward instead. Ethereum's 2024 Dencun upgrade added dedicated "blob" data space specifically for rollups, cutting their fees sharply, and by 2026 a small group of networks, chiefly Arbitrum, Base, and Optimism's OP Stack family, handle the large majority of Ethereum Layer 2 activity and total value locked.

Trade-offs remain: many rollups still rely on a single sequencer to order transactions, creating centralization and censorship risk, and withdrawing funds from an optimistic rollup back to Layer 1 can take days during the fraud-proof challenge period.