Trading Defined
Cryptocurrency and BlockchainIntermediate

Layer 1 and Layer 2L1

A layer 1 is a base blockchain such as Bitcoin or Ethereum; a layer 2 is a network built on top of one to make transactions faster and cheaper.

A layer 1 is a base blockchain like Bitcoin or Ethereum. A layer 2 runs on top to make transactions cheaper and faster while still relying on the base chain for security. Traders meet L2s when they bridge funds or trade on L2 exchanges.

Category
Cryptocurrency and Blockchain
Reading time
3 min
Also called
L1 and L2, Rollups, Scaling layers
Updated

L1 and L2 in plain words

A layer 2 is a separate chain built on top of Ethereum that borrows Ethereum's security.1

Layer 2 solutions process transactions off the main chain and later record the results on it.2

Rollups pack hundreds of transactions into one transaction on layer 1.1

How a rollup works

  1. User trades on L2

    The transaction executes on the rollup, not on L1.

  2. Batch

    Rollups bundle hundreds of transactions into one L1 transaction.1

  3. Share the fee

    This spreads L1 fees across everyone in the rollup.1

  4. Post data

    Data goes to L1, so reverting a rollup transaction requires reverting Ethereum.1

  5. Prove validity

    Optimistic rollups use fault proofs and can be challenged.1 Zero-knowledge rollups use validity proofs.1

  6. Withdraw

    Moving back to L1 follows the rollup's exit rules, which differ by design.

Worked examples

Example 1 — Sharing L1 cost

$0.10 each

Hypothetically one L1 batch costs $50 and carries 500 L2 transactions.

Example 1 — Sharing L1 cost — calculation
Cost per user$50 ÷ 500 = $0.10
Versus own L1 tx$50 − $0.10 = $49.90 saved

Batching spreads the layer-1 fee across everyone in the batch, so each user pays far less.1

Example 2 — Small trade cost

2% vs 0.05%

A hypothetical $200 trade costs $4 in L1 gas or $0.10 on L2.

Example 2 — Small trade cost — calculation
L1 cost share$4 ÷ $200 = 2%
L2 cost share$0.10 ÷ $200 = 0.05%

The saving comes from rollups making it cheaper for each user.1

Example 3 — Security link

Inherits L1 security

Hypothetically a rollup posts a batch to L1 and Ethereum later finalizes that block.

Example 3 — Security link — calculation
Rollup stateRecorded on L1
To reverse itMust reverse Ethereum

Once its data is posted to layer 1, undoing a rollup transaction would mean undoing Ethereum itself.1

Layer 1 vs Layer 2

AspectLayer 1Layer 2
RoleBase chain and settlementExecution on top
FeesHigher when busyLower, shared via batching
SecurityIts own validators or minersInherited from L1
Extra riskNetwork congestionBridge, sequencer and exit rules

Where traders use L1 and L2

Advantages and disadvantages

Advantages

  • Much lower fees per transaction.
  • Faster confirmations for users.
  • Keeps L1 security for posted data.
  • Opens DeFi to small traders.

Disadvantages

  • Liquidity is split across many L2s.
  • Bridging adds steps and risks.
  • Withdrawal times vary by design.
  • Some components can be more centralized.

Going deeper

Read as far as you need. Each level builds on the one before it.

Base and top

Beginner

L1 is the base chain; an L2 extends it and inherits its security.1

Two rollup types

Intermediate

Optimistic rollups assume validity but can be challenged with fault proofs; zero-knowledge rollups submit validity proofs.1

Off-chain execution

Advanced

IOSCO notes Layer 2 transactions occur off-chain and are eventually recorded on the blockchain, so the timing of that recording matters for settlement.2

Common mistakes

  1. Sending to the wrong network

    Funds land on a chain the venue does not support.

  2. Ignoring bridge risk

    The bridge can be the weakest link.

  3. Expecting instant exits

    Withdrawals follow each rollup's rules.

  4. Chasing thin liquidity

    Low fees do not help if slippage is high.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1A $30 batch carries 300 transactions. Cost per user?
Q2Which rollup uses fault proofs?

Key points to remember

  1. Layer 1 is the base chain.
  2. Layer 2 runs on top and inherits L1 security.
  3. Rollups batch many transactions into one.
  4. Optimistic and ZK rollups differ in proofs.
  5. Check bridge and exit rules before moving funds.

Frequently asked questions

Is Bitcoin a layer 1?

Yes; it is a base chain with its own consensus.

Are L2s as safe as L1?

They inherit L1 security for posted data, but add bridge and operator risks.

Why do exchanges list several networks?

So you can deposit on L1 or a cheaper L2; pick the one the venue supports.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. ethereum.org. What is layer 2? (opens in a new tab) Checked .
  2. IOSCO. Decentralized Finance Report (OR01/2022) (opens in a new tab) Checked .

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.