To understand Layer 2, we start with Layer 1. The Layer 1 network of the Uniswap Protocol is the Ethereum blockchain.
All trades and liquidity transactions are processed by the Ethereum network and stored in the Ethereum blockchain. The Ethereum network is only able to handle a certain level of transactions each day.
As demand for Ethereum has grown, more people have begun bidding for the right to process a transaction on Ethereum.
As a result, the cost to process your transaction has increased - sometimes costing hundreds of US Dollars.
A Layer 2 is a second network or blockchain built on top of the Layer 1 Ethereum blockchain while preserving the security and decentralization guarantees of Ethereum.
These networks use a technology called "optimistic rollups" to increase scalability of the Ethereum blockchain.
Users of Layer 2 networks can typically expect lower transaction fees (gas) and nearly instant confirmation times for your transaction.
These Layer 2 networks accept transactions from many users at a time and then "rollup" the result into a single transaction that is written to the Layer 1 Ethereum blockchain.
To use one of these Layer 2 networks, you will first need to deposit funds from your Layer 1 wallet to Layer 2.
Please be aware that both Optimistic Ethereum and Arbitrum are in Beta Release at this time and should be used with caution.
You can start by learning more about these Layer 2 networks.
Layer 2 Network Key takeaways
A Layer 2 is a scaling solution built on top of Ethereum to reduce transaction costs.
Layer 2’s are still in Beta Release and risks may exist. Please understand these risks before choosing to deposit assets to the network.
There is a real possibility that errors occur on a Layer 2 resulting in a total loss of funds. This risk is independent of the security of the Uniswap protocol as it exists on Ethereum Layer 1. If there is a critical error found in a Layer 2, it can impact the security of funds locked in any protocol deployed within it, including the Uniswap protocol.