Layer 2 Network, which is also known as L2, is a blockchain built on top of Ethereum. Its purpose is to make transactions faster and cheaper without compromising the security of Ethereum.
L2 does not process every transaction directly on the Ethereum mainnet; instead, it executes each transaction individually before sending the compressed data back to Ethereum in batches. This way, tens of thousands of users can share the cost of a single settlement transaction. Ethereum describes rollup as a system that moves execution off-chain but still publishes the data back to Layer for security purposes.
Common examples include Arbitrum, Optimism, and Base.
How does Layer 2 work?
Most Ethereum L2 use sorters (sequencer) to receive, sort, and execute user transactions.
The sorter will package a large number of transactions into a batch, compress them, and ultimately submit the necessary data to Ethereum. Optimistic approaches like Arbitrum and Optimism rely on proof of fraud, while ZK-rollup uses proof of cryptographic validity.
It is precisely this basic structure that enables Arbitrum and Optimism to offer transactions at a much lower cost than those on the Ethereum mainnet, while still relying on Ethereum for settlement and data availability.
Since the upgrade from Dencun, many rollup have switched to publishing transaction data through the lower-cost blob instead of using the permanent calldata, which has reduced one of their main operating costs.
Layer How does the internet make money?
Its core business model is relatively simple:
Users pay transaction fees → L2 pays for Ethereum and infrastructure costs → The network retains the difference.
When users exchange tokens on a certain L2, transfer ETH, or use the DeFi application, they will pay a fee to that network.
A portion of the fees is used to cover the execution costs associated with L2, while another part is used to cover the costs of publishing the transaction data back to Ethereum. Taking Arbitrum as an example, it explicitly charges a L1 data fee to compensate the entity that publishes the transaction batches to Ethereum.
After deducting these costs, the remaining amount may become the profit for the sorter.
Centralized sorters may also obtain MEV, which is the maximum extractable value, by deciding the order in which transactions are included. This revenue model is also one of the reasons why some L2 projects are exploring decentralized sorting or sorting based on Ethereum. A previous round of efforts to decentralize rollup pointed out that Arbitrum and Base have already generated considerable revenue through centralized sorters.
Revenue can also be shared with a larger ecosystem.
Some L2 adopt an income-sharing agreement.
For example, Superchain requires OP Chains to contribute the higher of the following two amounts to Optimism Collective: 2.5% of on-chain revenue, or 15% of on-chain profits. Profits are defined as revenue from fees minus the costs associated with Ethereum L1 gas.
This means that a network like Base can not only generate revenue from its own activities but also reinvest a portion of that economic profit back into a broader ecosystem.
An important distinction is that the revenue from L2 does not automatically flow to the token holders. A network can generate millions of dollars in sorter fees, but its governance tokens do not necessarily have a direct claim to this portion of the revenue.
