# Understanding Layer-2

By [Alexology](https://paragraph.com/@alexology) · 2023-05-24

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**What is Layer-2**

Layer-2 (L2) refers to a set of scaling solutions built on top of an existing blockchain protocol (like Bitcoin or Ethereum), which we consider as "Layer 1." The purpose of Layer 2 solutions is to improve the performance, scalability, and efficiency of the underlying blockchain.

![Source: https://www.8btc.com/media/6699616](https://storage.googleapis.com/papyrus_images/ba75d19dd79db725ab75b9a25aa29cd83fc5de6d140a88f322794951290a6893.png)

Source: https://www.8btc.com/media/6699616

Ethereum and Layer 2 solutions can be analogized with central banks and local banks to understand their roles in the blockchain ecosystem. Ethereum, akin to a central bank, is responsible for maintaining the overall security, consensus, and integrity of the network, similar to how a central bank regulates the financial system and manages policy (similar to consensus). Layer 2 solutions, on the other hand, resemble local banks that handle day-to-day transactions and cater to the needs of individual customers. By offloading some transaction processing from the main Ethereum chain, Layer 2 solutions can provide faster and cheaper services, just as local banks streamline everyday financial interactions.

**Why L2**

L2 aims to achieve higher speed. Ethereum has faced questions over its ability to compete with centralized platforms, which can handle up to 24,000 transactions per second (TPS) with Visa. In comparison, Ethereum's [maximum](https://ethtps.info/) recorded TPS has been 57, and its [average](https://etherscan.io/) TPS is below 20 recently. L2 aims to increase its TPS to several thousand and beyond.

L2 has lower gas fees. On Ethereum, the gas fee is determined by the code running, not the amount of money being transferred. This means that for smaller transactions, the user is paying a higher relative fee. Ethereum has a problem with high fees charged to users for small transactions. The cost of sending $100 in Ethereum is $4.7, while it is only $0.3 in Arbitrum. By reducing the transaction fee from 5% to 0.3% for $100 transactions, L2 can unlock the potential for retail user adoption.

**How**

L2 solutions work by moving some of the transactions and computations off Ethereum, thus improving its performance. There are various layer 2 solutions available, including rollups, plasma, sidechains, and state channels.

From 2022 to 2023, the most popular L2 solution is rollup, which bundle multiple transactions into a single proof, while keeping it secure.

![Source: https://rainandcoffee.substack.com/p/the-fuel-for-fast-execution](https://storage.googleapis.com/papyrus_images/a12dbd908df122e1a7962dc2bd3c2d196b83e2e3a723eecac701d98c93ec639b.png)

Source: https://rainandcoffee.substack.com/p/the-fuel-for-fast-execution

Examples of rollups include optimistic rollups (Arbitrum and Optimism) and zk-rollups (ZkSync and Polygon zkEVM):

*   Optimistic Rollups assume that the person who combined the transactions (called the "aggregator") always submits correct summaries, which is why it's called "optimistic". However, the "fraudproof" process lets anyone question and check the summaries if they think there might be a mistake. If the question is valid, the mistake is undone, and the aggregator will be punished.
    
*   Zk-Rollups use [zero-knowledge proofs](https://hackernoon.com/eli5-zero-knowledge-proof-78a276db9eff) to verify the validity of transactions. This allows for a more secure and trustless system, as anyone can validate the proofs without having to rely on a single aggregator.

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*Originally published on [Alexology](https://paragraph.com/@alexology/understanding-layer-2)*