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TVL locked in layer 2 (USD)
Average layer 2 ETH transfer fee (USD)
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What is layer 2?
Layer 2 (L2) is a collective term to describe a specific set of Ethereum scaling solutions. A layer 2 is a separate blockchain that extends Ethereum and inherits the security guarantees of Ethereum.
Now let’s dig into it a bit more, and to do this we need to explain layer 1 (L1).
What is layer 1?
Layer 1 is the base blockchain. Ethereum and Bitcoin are both layer 1 blockchains because they are the underlying foundation that various layer 2 networks build on top of. Examples of layer 2 projects include "rollups" on Ethereum and the Lightning Network on top of Bitcoin. All user transaction activity on these layer 2 projects can ultimately settle back to the layer 1 blockchain.
Ethereum also functions as a data availability layer for layer 2s. Layer 2 projects will post their transaction data onto Ethereum, relying on Ethereum for data availability. This data can be used to get the state of the layer 2, or to dispute transactions on layer 2.
Ethereum as the layer 1 includes:
A network of node operators to secure and validate the network
A network of block producers
The blockchain itself and the history of transaction data
The consensus mechanism for the network
Still confused on Ethereum? Learn what Ethereum is.
Why do we need layer 2?
Three desirable properties of a blockchain are that it is decentralized, secure, and scalable. The blockchain trilemma states that a simple blockchain architecture can only achieve two out of three. Want a secure and decentralized blockchain? You need to sacrifice scalability.
Ethereum has reached the network's current capacity with 1+ million transactions per day and high demand for each of these transactions. The success of Ethereum and the demand to use it has caused gas prices to rise substantially. Therefore the need for scaling solutions has increased in demand as well. This is where layer 2 networks come in.
The main goal of scalability is to increase transaction speed (faster finality) and transaction throughput (higher transactions per second) without sacrificing decentralization or security.
The Ethereum community has taken a strong stance that it would not throw out decentralization or security in order to scale. Until sharding, Ethereum Mainnet (layer 1) is only able to process roughly 15 transactions per second. When demand to use Ethereum is high, the network becomes congested, which increases transaction fees and prices out users who cannot afford those fees. That is where layer 2 comes in to scale Ethereum today.More on Ethereum's vision
Benefits of layer 2
By combining multiple off-chain transactions into a single layer 1 transaction, transaction fees are massively reduced, making Ethereum more accessible for all.
Layer 2 blockchains settle their transactions on Ethereum Mainnet, allowing users to benefit from the security of the Ethereum network.
Expand use cases
With higher transactions per second, lower fees, and new technology, projects will expand into new applications with improved user experience.
How does layer 2 work?
As we mentioned above, Layer 2 is a collective term for Ethereum scaling solutions that handle transactions off Ethereum layer 1 while still taking advantage of the robust decentralized security of Ethereum layer 1. A layer 2 is a separate blockchain that extends Ethereum. How does that work?
A layer 2 blockchain regularly communicates with Ethereum (by submitting bundles of transactions) in order to ensure it has similar security and decentralization guarantees. All this requires no changes to the layer 1 protocol (Ethereum). This lets layer 1 handle security, data availability, and decentralization, while layer 2s handles scaling. Layer 2s take the transactional burden away from the layer 1 and post finalized proofs back to the layer 1. By removing this transaction load from layer 1, the base layer becomes less congested, and everything becomes more scalable.
Rollups are currently the preferred layer 2 solution for scaling Ethereum. By using rollups, users can reduce gas fees by up to 100x compared to layer 1.
Rollups bundle (or ’roll up’) hundreds of transactions into a single transaction on layer 1. This distributes the L1 transaction fees across everyone in the rollup, making it cheaper for each user. Rollup transactions get executed outside of layer 1 but the transaction data gets posted to layer 1. By posting transaction data onto layer 1, rollups inherit the security of Ethereum. There are two different approaches to rollups: optimistic and zero-knowledge - they differ primarily on how this transaction data is posted to L1.
Optimistic rollups are 'optimistic' in the sense that transactions are assumed to be valid, but can be challenged if necessary. If an invalid transaction is suspected, a fault proof is ran to see if this has taken place.
Zero-knowledge rollups use validity proofs where transactions are computed off-chain, and then compressed data is supplied to Ethereum Mainnet as a proof of their validity.
Do your own research: risks of layer 2
Since layer 2 chains inherit security from Ethereum, in an ideal world, they are as safe as L1 Ethereum. However, many of the projects are still young and somewhat experimental. After years of research and development, many of the L2 technologies that will scale Ethereum launched in 2021. Many projects still have additional trust assumptions as they work to decentralize their networks. Always do your own research to decide if you're comfortable with any risks involved.
For more information on the technology, risks, and trust assumptions of layer 2s, we recommend checking out L2BEAT, which provides a comprehensive risk assessment framework of each project.
Use layer 2
Now that you understand why layer 2 exists and how it works, let's get you up and running!
NOTE: When bridging over and using layer 2, it is important to note that you will control the address for your EOA account (an account where only a single private key controls the account) just like on Ethereum Mainnet. However, if you are using a contract account, such as Gnosis Safe or Argent, you will not have control over this address on a layer 2 until you redeploy your contract account to that address on the layer 2. If you are bridging or sending funds to a contract account, and you do not control this address for the contract account, your funds may be lost.
Generalized layer 2s
Generalized layer 2s behave just like Ethereum — but cheaper. Anything that you can do on Ethereum layer 1, you can also do on layer 2. Many dapps have already begun to migrate to these networks or have skipped Mainnet altogether to deploy straight on a layer 2.
Arbitrum is an Optimistic Rollup that aims to feel exactly like interacting with Ethereum, but with transactions costing a fraction of what they do on L1.
Note: Fraud proofs only for whitelisted users, whitelist not open yet
Optimism is a fast, simple, and secure EVM-equivalent optimistic rollup. It scales Ethereum's tech while also scaling its values through retroactive public goods funding.
Note: Fault proofs in development
Application specific layer 2s
Application specific layer 2s are projects that specialize in optimizing for a specific application space, bringing improved performance.
Loopring's zkRollup L2 solution aims to offer the same security guarantees as Ethereum mainnet, with a big scalability boost: throughput increased by 1000x, and cost reduced to just 0.1% of L1.
zkSync is a user-centric zk rollup platform from Matter Labs. It is a scaling solution for Ethereum, already live on Ethereum mainnet. It supports payments, token swaps and NFT minting.
The ZKSpace platform consists of three main parts: a Layer 2 AMM DEX utilizing ZK-Rollups technology called ZKSwap, a payment service called ZKSquare, and an NFT marketplace called ZKSea.
A note on sidechains, validiums, and alternative blockchains
Sidechains and validiums are blockchains that allow assets from Ethereum to be bridged over and used on another blockchain. Sidechains and validiums run in parallel with Ethereum, and interact with Ethereum through bridges, but they do not derive their security or data availability from Ethereum.
Both scale similarly to layer 2s - they offer lower transaction fees and higher transaction throughput - but have different trust assumptions.
Some layer 1 blockchains have higher throughput and lower transaction fees than Ethereum. These alternative layer 1s have had to sacrifice on security or decentralization in order to achieve higher transactions per second and lower transaction fees.
The Ethereum ecosystem is firmly aligned that layer 2 scaling is the only way to solve the scalability trilemma while remaining decentralized and secure.
How to get onto a layer 2
There are two primary ways to get your assets onto a layer 2: bridge funds from Ethereum via a smart contract or withdraw your funds on an exchange directly onto the layer 2 network.
Funds in your wallet?
If you've already got your ETH in your wallet, you'll need to use a bridge to move it from Ethereum Mainnet to a layer 2.
Funds on an exchange?
Some centralized exchanges now offer direct withdrawals and deposits to layer 2s. Check which exchanges support layer 2 withdrawals and which layer 2s they support.
You'll also need a wallet to withdraw your funds to. Find an Ethereum wallet.
Tools to be effective on layer 2
- A rollup-centric ethereum roadmap - Vitalik Buterin
- An Incomplete Guide to Rollups - Vitalik Buterin
- Polygon sidechain vs Ethereum rollups: Layer 2 scaling approaches| Vitalik Buterin and Lex Fridman - Lex Clips
- ROLLUPS - The Ultimate Ethereum Scaling Strategy? Arbitrum & Optimism Explained - Finematics
- Scaling layer 1 with shard chains
- Understanding rollup economics from first principals - Barnabé Monnot