What is Layer 2?

Layer 2 refers to protocols built on top of a base blockchain (Layer 1) to improve scalability. They process transactions off the main chain while inheriting its security.

Types of Layer 2s:

• Optimistic rollups: Assume transactions valid, fraud proofs if disputed (Arbitrum, Optimism)
• ZK rollups: Use zero-knowledge proofs to verify transactions (zkSync, StarkNet)
• State channels: Off-chain transactions between parties (Lightning Network)
• Sidechains: Separate chains with own security (Polygon PoS)

Benefits: 10-100x cheaper fees, faster confirmations, same security as Layer 1 (for rollups).

Popular L2s: Arbitrum, Optimism, Base (Ethereum); Lightning Network (Bitcoin).

Major L2 solutions and how rollups work: The leading Ethereum L2s include Arbitrum, the largest by total value locked, Optimism, which powers the OP Stack framework, Base, Coinbase's L2 built on the OP Stack, and zkSync, a pioneer in zero-knowledge rollup technology. Rollups work by executing transactions off-chain and then posting compressed transaction data back to Ethereum mainnet. Optimistic rollups assume all transactions are valid by default and rely on a challenge period during which anyone can submit a fraud proof if they detect an invalid transaction. ZK rollups take a different approach, generating cryptographic validity proofs that mathematically guarantee correctness before data is posted on-chain, enabling faster finality. L2s are critical for DeFi scalability because decentralized trading, lending, and yield farming require frequent, low-cost transactions that are economically impractical on Ethereum mainnet during periods of high congestion. By offloading execution to L2s while preserving Ethereum's security guarantees, the ecosystem can support millions of users and billions in transaction volume without prohibitive fees.