A layer-2 network is built on top of an existing blockchain (the layer 1) to handle transactions faster and at lower cost, then periodically settles the result back on the base chain. Most layer-2 solutions for Ethereum are either rollups or state channels.
Rollups bundle many transactions into a single batch and post compressed proof to Ethereum. Optimistic rollups assume transactions are valid by default and allow a fraud-proof window; ZK-rollups use cryptographic validity proofs that are verified instantly. Both dramatically reduce per-transaction gas costs.
Security still ultimately rests on the layer-1 chain, which is the appeal. The trade-off is additional complexity: bridging assets between layers introduces its own risk, and bridge contracts have been among the largest targets for crypto hacks.
Worked example
Arbitrum and Optimism are Ethereum layer-2 networks where the same DeFi actions cost a fraction of mainnet gas fees.
This definition is general education, not investment advice. Markets — especially crypto — are volatile and you can lose money. Please read our disclaimer and see our methodology.