Layer 2 networks and rollups, explained

What is a layer 2 network?

The main Ethereum blockchain is called layer 1 (L1). ethereum.org defines the next level up like this: “Layer 2 (L2) is a collective term to describe a specific set of Ethereum scaling solutions.”

These solutions sit outside the main chain. ethereum.org’s developer docs explain that “Offchain solutions are implemented separately from layer 1 Mainnet - they require no changes to the existing Ethereum protocol.” Your transaction is processed by the layer 2 network first, and Ethereum is where the results are recorded and agreed.

If Ethereum, gas or smart contracts are new to you, read that guide first — layer 2 only makes sense once you know what layer 1 does.

Why does Ethereum need layer 2?

Blockchains face a trade-off often called the blockchain trilemma: security, decentralisation and scalability are hard to get all at once. ethereum.org puts it simply: “Want a secure and decentralized blockchain? You need to sacrifice scalability.”

Busy periods get expensive. ethereum.org’s gas documentation explains that when there is too much demand, users must offer higher tips to outbid other users’ transactions — see our guide to network fees (gas). ethereum.org describes the goal of scaling as increasing transaction speed and throughput “without sacrificing decentralization or security”. Layer 2 tries to do that by moving most of the work off the main chain.

How do rollups work?

Rollups are one kind of layer 2, and the kind this guide covers. ethereum.org’s definition: “Rollups perform transaction execution outside layer 1 and then the data is posted to layer 1 where consensus is reached.”

The cost saving comes from batching. “Rollups bundle (or ‘roll up’) hundreds of transactions into a single transaction on layer 1,” says ethereum.org, so the layer 1 fee is spread across everyone in the batch.

Illustrative example (hypothetical numbers): if posting one batch to Ethereum cost a fee of 5 units and the batch held 100 users’ transactions, each user’s share would be 5 ÷ 100 = 0.05 units, plus whatever the rollup itself charges. Real fees change constantly.

Because the transaction data ends up inside Ethereum blocks, ethereum.org says rollups can be “secured by native Ethereum security”. The hard question is how Ethereum knows the rollup’s results are correct. The two main answers give us the two types of rollup.

What is an optimistic rollup?

ethereum.org: “Optimistic rollups are considered ‘optimistic’ because they assume offchain transactions are valid and don’t publish proofs of validity for transaction batches posted onchain.”

Instead of proving every batch, they rely on challenges. After a batch is posted there is a challenge period, during which anyone can submit a fraud proof showing a result is wrong. ethereum.org’s plain-English summary: optimistic rollups “use fault proofs where transactions are assumed to be valid, but can be challenged if an invalid transaction is suspected.”

The trade-off is time. “Users must wait for the one-week challenge period to expire before withdrawing funds back to Ethereum,” according to ethereum.org. Some services shorten the wait: “A liquidity provider assumes ownership of a pending L2 withdrawal and pays the user on L1 (in exchange for a fee).” That means paying a fee and trusting a third party.

What is a zero-knowledge (ZK) rollup?

Zero-knowledge rollups also bundle transactions and execute them off the main chain. The difference is that each batch comes with a validity proof — in ethereum.org’s words, “a cryptographic assurance that the state-change proposed by the rollup is really the result of executing the given batch of transactions.” Ethereum checks the proof rather than waiting for challenges. Common proof systems are called ZK-SNARKs and ZK-STARKs.

The result is faster exits: “There are no delays when moving funds from a ZK-rollup to Ethereum because exit transactions are executed once the ZK-rollup contract verifies the validity proof.”

The costs are real too. ethereum.org notes that “The cost associated with computing and verifying validity proofs is substantial and can increase fees for rollup users,” and that building ZK-rollups compatible with Ethereum’s virtual machine is difficult because the technology is complex.

Optimistic vs ZK rollups: what is the difference?

Source: ethereum.org developer documentation on optimistic and zero-knowledge rollups. Neither design is “better” for every use; each makes a different trade-off.

What are the risks of using layer 2 networks?

• Young technology. ethereum.org says many layer 2 projects “are still young and somewhat experimental”, and points readers to the independent site L2BEAT for project-by-project risk assessments.
• Censorship by operators. “Rollup operators can censor users by going offline completely, or by refusing to either produce blocks that include certain transactions in them” (ethereum.org).
• Centralisation of provers. For ZK-rollups, “Producing validity proofs requires specialized hardware, which may encourage centralized control of the chain by a few parties” (ethereum.org).
• Slow exits. Optimistic rollups make you wait a week to withdraw to Ethereum, or pay a third party to front the funds.
• Bridge risk. Moving funds between Ethereum and a layer 2, or between layer 2s, uses bridges, which carry their own smart-contract and custody risks (ethereum.org). See our guide to crypto bridges.
• Smart-contract risk and scams. ethereum.org says interactions with smart contracts are irreversible, so mistakes are hard to undo. The FBI has warned about spoofed websites that trick people into connecting their wallets to “drainer” contracts — learn the red flags of crypto scams.

Blockhorizon is an education site. Nothing here is a recommendation to use any particular network or buy any crypto-asset.