Ethereum's Layer 2 Networks: Speeding Up and Cutting Costs
Layer 2 (L2) networks are blockchains built on top of Ethereum to speed up and reduce the cost of transactions without sacrificing security. Instead of processing each transaction directly on the Ethereum mainnet, L2s execute them separately and then send compressed batches back to Ethereum. This allows thousands of users to share the cost of a single settlement transaction.
Most Ethereum L2s use a sequencer, which receives, orders, and executes user transactions. The sequencer groups many transactions into a batch, compresses them, and eventually submits the necessary data to Ethereum. Optimistic rollups like Arbitrum and Optimism rely on fraud proofs, while ZK-rollups use cryptographic validity proofs.
The core business model of L2 networks is relatively simple: users pay transaction fees, which cover execution costs on the L2 and posting transaction data back to Ethereum. The remaining amount becomes profit for the network. Centralized sequencers can also capture maximum extractable value (MEV) by determining the order in which transactions are included.