Blockchains are composed of layers. These are not literal layers, like the sauce and pasta that form lasagna, but metaphorical ones that help explain how blockchains can take a load off each other. The most common blockchain layers are layer 1s (L1) and layer 2s (L2).
Bitcoin and Ethereum are L1s, or base layers, blockchains because they operate independently from other blockchains. Computers produce blocks on them and secure the network—by mining in the case Bitcoin and staking for Ethereum. Avalanche, Solana, and Cardano are other examples of L1 blockchains.
L1s work well until the network clogs up, which pushes fees higher. This is known as the “scalability” problem. Such problems befell Ethereum during the bull market of 2021, when network fees skyrocketed. Paying $50 in fees to buy a single NFT was common as Ethereum’s popularity soared.
Ethereum developers responded by creating a series of fast and cheap L2 blockchains to sit atop the main chain. These included technologies like “rollups,” which replicate the Ethereum experience on other chains but in a faster and cheaper fashion. L2s achieve this by bundling lots of L2 transactions into a single L1 transaction—kind of like Uber Pool for crypto.
Most L2s are built on Ethereum to compensate for the slow speeds and high cost that made that the chain unviable for many back in 2021. Ethereum’s L2s tend to be a lot cheaper than L1s; transaction fees on an L2 decentralized lending protocol can be 20 times less expensive than on an L1. Yet in doing so, L2s still rely on the security of the L1.
Arbitrum is the largest Ethereum L2, with around $870 million locked into its smart contracts and 116 protocols, as of October 2022. Optimism, another layer 2, lags narrowly behind with $850 million locked into 72 protocols. Another popular L2 service is Polygon, which is technically a “sidechain” and not a roll up since it has its own consensus mechanism.
The widely adopted layer-2 chain for Bitcoin is called the Lightning Network. It lets people pay for things in Bitcoin without requiring the base-layer blockchain to confirm transactions. That makes payments instantaneous—although anyone who uses it must first lock up however much Bitcoin they plan to use.
Go deeper:
Understanding rollup economics from first principles—Barnabé Monnot, Ethereum Foundation
Scalable off-chain instant payments—White paper
See also:
What is Ethereum?
What are crypto bridges?
Try it:
Hop Exchange—send crypto between different Ethereum layers
Strike—send Bitcoin to this beginner-friendly (custodial) Lightning Network wallet
