Layer 2 is a scaling solution that sits on top of a base blockchain. The base chain, called Layer 1, handles security and final settlement. Layer 2 handles transactions. The idea is to move work off the main chain, process it faster and cheaper, then post a compressed summary back to Layer 1. Users get lower fees. The base chain gets less congestion. Everyone keeps the security guarantees of the underlying network.

Ethereum's mainnet processes around 15 transactions per second. That is not enough for global payments, let alone microtransactions. Layer 2 networks like Arbitrum, Optimism, and Base process thousands of transactions per second by batching them off-chain. They settle to Ethereum periodically, which inherits Ethereum's security. The trade-off is complexity. Moving funds between Layer 1 and Layer 2 requires a bridge. Withdrawals can take days depending on the design. Different Layer 2s use different technologies, and not all of them are equally secure. The user experience is improving, but it is still not seamless.

Layer 2 approaches

• Optimistic rollups — assume transactions are valid, challenge period for fraud proofs
• ZK rollups — generate cryptographic proofs of validity
• State channels — off-chain transactions with on-chain settlement
• Plasma — older design, largely superseded by rollups

Layer 2 is where most Ethereum activity is heading. Mainnet is becoming a settlement layer for rollups.