What Is a Layer 2 and How Do L2 Networks Make Money?

Layer 2 networks, or L2s, are blockchains built on top of Ethereum to make transactions faster and cheaper without giving up Ethereum’s security.

Instead of processing every transaction directly on Ethereum mainnet, L2s execute transactions separately and then send compressed batches of data back to Ethereum. This lets thousands of users share the cost of a single settlement transaction. Ethereum describes rollups as systems that move execution offchain while still posting data back to Layer 1 for security.

Popular examples include Arbitrum, Optimism and Base.

How Does a Layer 2 Work?

Most Ethereum L2s use a sequencer to receive, order and execute user transactions.

The sequencer groups many transactions into a batch, compresses them and eventually submits the necessary data to Ethereum. Optimistic rollups such as Arbitrum and Optimism rely on fraud proofs, while ZK-rollups use cryptographic validity proofs.

That basic structure is why Arbitrum and Optimism can offer significantly cheaper transactions than Ethereum mainnet while still depending on Ethereum for settlement and data availability.

Since the Dencun upgrade, many rollups have posted transaction data through cheaper blobs instead of permanent calldata, reducing one of their largest operating costs.

How Do Layer 2 Networks Make Money?

The core business model is relatively simple:

Users pay transaction fees → the L2 pays Ethereum and infrastructure costs → the network keeps the difference.

When someone swaps tokens, transfers ETH or uses a DeFi app on an L2, they pay a fee to the network.

Part of that fee covers execution on the L2. Another part covers the cost of posting transaction data back to Ethereum. Arbitrum, for example, explicitly charges an L1 data fee designed to reimburse the entity posting transaction batches to Ethereum.

Whatever remains after those costs can become sequencer profit.

Centralized sequencers can also potentially capture MEV, or maximum extractable value, by determining the order in which transactions are included. That revenue model is one reason some L2 projects are exploring decentralized or Ethereum-based sequencing. A previous rollup decentralization push highlighted that Arbitrum and Base had already generated substantial revenue from centralized sequencers.

Revenue Can Also Be Shared With a Larger Ecosystem

Some L2s operate under revenue-sharing agreements.

Optimism’s Superchain, for example, requires OP Chains to contribute the greater of 2.5% of chain revenue or 15% of onchain profit to the Optimism Collective. Profit is defined as fee revenue minus Ethereum L1 gas costs.

That means a network such as Base can generate money from its own activity while also sending part of its economics back to the broader ecosystem.

One important distinction is that L2 revenue does not automatically flow to token holders. A network can generate millions in sequencer fees while its governance token provides no direct claim on that income.