Ethereum's network has faced significant challenges, including congestion and high transaction fees, prompting the need for scalable solutions.

In response, layer 2 networks have emerged to enhance scalability by operating on top of existing blockchains, increasing transaction capacity.

Rollups have become the most popular scaling solution, bundling transactions off-chain and submitting proofs to the mainnet, which allows for integration with complex decentralized applications (dApps).

There are two main types of rollups: optimistic rollups, which assume transaction validity, and zero-knowledge (ZK) rollups, which verify transactions before submission, with optimistic rollups being more widely adopted.

Sidechains also play a critical role, operating independently while connecting to the mainnet, facilitating faster transactions, and supporting various applications in decentralized finance (DeFi), NFTs, and gaming.

State channels enable peer-to-peer transactions off-chain, but they are limited to payment use cases and do not support dApps.

Advanced layer 2 technologies, including sidechains and rollups, have been developed to enhance dApp compatibility and reduce transaction costs.

Despite challenges such as complexity, liquidity fragmentation, and security risks, the growth of DeFi and Web3 applications is driving the adoption of user-friendly dApps on layer 2 networks.

The ICO boom in 2017-2018 saw the creation of several layer 2 solutions on Ethereum, including Raiden Network and Matic (now Polygon).

Layer 2 networks are continuously evolving, with platforms like Arbitrum Orbit and zkSync's hyperchains enhancing performance and customization.

As of December 2024, the total value locked (TVL) in Ethereum layer 2 solutions has reached $60 billion, with significant contributions from Arbitrum, Optimism, and Base.

Bitcoin has also seen the development of layer 2 solutions like Stacks and Rootstock, with its sidechains' total value locked nearing $3 billion.