Layer 2
A secondary protocol built on top of a Layer 1 blockchain to improve scalability, reduce transaction costs, and increase throughput without sacrificing the security guarantees of the underlying chain. Layer 2 solutions process transactions off the main chain and periodically post compressed proofs or data back to Layer 1 for finality.
“Arbitrum and Optimism are Layer 2 rollups for Ethereum that can process transactions for pennies instead of dollars, while still inheriting Ethereum's security through periodic settlement.”
Rollup
A Layer 2 scaling solution that executes transactions off-chain, compresses them, and posts transaction data or validity proofs to the main chain for finality. Rollups inherit the security of the underlying blockchain while dramatically increasing throughput and reducing costs. The two main types are Optimistic rollups (assume transactions are valid unless challenged during a dispute window) and ZK rollups (use cryptographic zero-knowledge proofs to verify transaction validity instantly).
Layer 1
The base blockchain network that provides the foundational infrastructure — consensus, security, and data availability — upon which applications and Layer 2 solutions are built. Layer 1 blockchains process and finalize transactions on their own mainnet and have their own native cryptocurrency for gas fees.
Scalability
A blockchain's ability to handle increasing transaction volume without degrading performance, increasing fees, or sacrificing decentralization and security. The 'scalability trilemma' (coined by Vitalik Buterin) posits that blockchains can only optimize two of three properties: decentralization, security, and scalability. Layer 2 solutions, sharding, and alternative consensus mechanisms are approaches to improving scalability.
Ethereum (ETH)
The second-largest cryptocurrency and the most widely used smart contract platform, created by Vitalik Buterin and launched in 2015. Ethereum introduced programmable blockchain functionality, enabling the creation of tokens, DeFi protocols, NFTs, and dApps. In September 2022, Ethereum transitioned from Proof of Work to Proof of Stake ('The Merge'), reducing energy consumption by over 99%.