L2 Networks Revolutionize Ethereum Transaction Fees

The Ethereum Layer 2 (L2) network is a blockchain built on top of Ethereum to make transactions faster and cheaper without sacrificing security. Instead of processing every transaction directly on Ethereum mainnet, L2s execute transactions separately and then send compressed batches of data back to Ethereum. This allows thousands of users to share the cost of a single settlement transaction.

Popular examples of L2 networks include Arbitrum, Optimism, and Base. They use a sequencer to receive, order, and execute user transactions. The sequencer groups many transactions into a batch, compresses them, and eventually submits the necessary data to Ethereum.

L2 networks make money through a simple business model: users pay transaction fees, which cover execution on the L2 and the cost of posting transaction data back to Ethereum. The remaining revenue can become sequencer profit. Centralized sequencers can also capture MEV (maximum extractable value) by determining the order in which transactions are included.

Some L2s operate under revenue-sharing agreements, such as Optimism's Superchain, which requires OP Chains to contribute the greater of 2.5% of chain revenue or 15% of onchain profit to the Optimism Collective.