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How to Save Money on Fees with Ethereum Layer-2s

By Evan Jones06/05/2023

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Ethereum (ETH), the second largest cryptocurrency by market cap, has an ecosystem full of interesting decentralized applications (Dapps), including decentralized exchanges (DEXs), lending platforms, and games. In order to interact with any of these Dapps, you need ETH to pay for fees, whether approving a transaction, agreeing to connect to a platform, or swapping one asset for another. All of these interactions incur fees that, when added up, account for a larger percentage of your payments than you’d like, especially when the Ethereum network is congested. 

The high fees on the main Ethereum layer are one of the main reasons that layer-2s (L2s) have become increasingly popular. In this guide, we’ll go over what layer-2s are, some of the most popular Ethereum L2s and their advantages, and a basic guide on how to get started using them. Let’s jump in. 

What’s a Layer-2? 

A layer-2 is a second blockchain layer, built upon the base blockchain’s framework. On this second layer, blockchain transactions and processes can take place independently of layer 1 (main chain), while still maintaining the security of the base layer. These are often referred to as off-chain transactions. 

The main goal of L2s is to solve the transaction speed and scaling difficulties that are seen with Bitcoin and Ethereum, which can only process 7 and 15 transactions per second, respectively. Bitcoin’s layer-2, the Lightning Network, allows the blockchain to process up to 1 million transactions per second, with room to scale higher. Ethereum has multiple L2s which we’ll look at below.

Popular Ethereum Layer-2s

Polygon (MATIC)

Polygon, formerly known as Matic Network, is the most popular L2 blockchain network built on top of Ethereum. Transactions on Polygon take place on child chains, keeping the majority of traffic off of the Ethereum parent chain. This results in faster and cheaper transactions on the Polygon network than on Ethereum. MATIC is the asset that powers the Polygon layer, meaning transaction fees are paid in MATIC rather than ETH.

The Polygon network is compatible with almost all of the same Dapps that Ethereum is. This includes Uniswap and OpenSea, Ethereum’s most popular decentralized exchange and NFT marketplace, respectively. Users can interact with these Dapps on Polygon rather than Ethereum for both faster transaction speeds and lower fees.

Arbitrum (ARB)

Arbitrum is another Ethereum L2 scaling solution that is similar to Polygon. It uses optimistic rollups to achieve its goal of improving speed, scalability and cost-efficiency on Ethereum, rather than child chains like Polygon. Arbitrum benefits from the security and compatibility of Ethereum’s main layer but has higher transaction throughput and lower fees. Much like with MATIC, that’s made possible because most of the computation and storage load is happening off-chain.

Arbitrum’s native token is called ARB and is used for governance. Unlike Polygon, on Arbitrum, ARB is only used for governance and not for transaction fees. On Arbitrum, fees are paid in ETH or any other ERC-20 asset which the platform supports. Arbitrum fees are generally about 80% less than if you use the Ethereum layer.

Optimism (OP)

Optimism (OP) is another L2 blockchain built on top of Ethereum. Like Polygon and Arbitrum, Optimism benefits from the security of the Ethereum base layer and helps to scale the Ethereum ecosystem by using optimistic rollups. That means transactions are recorded in a trustless manner on Optimism but ultimately secured on Ethereum. This is similar to how Arbitrum works, and results in the same higher transaction throughput but lower fees. 

OP is a governance token like with Arbitrum, with fees being paid in ETH or any other ERC-20 the platform supports. For reference, the average fee for swapping assets on Uniswap on the Ethereum base layer is over $20, whereas when you use Optimism it’s under $2.

Base

Coinbase (COIN) exchange announced the launch of their own L2 blockchain that is built on top of Ethereum, called Base, in February. They’re actually joining Optimism’s “OP Stack” and are therefore the second L2 in the stack. As with the other L2s mentioned, Base leverages the proven security of Ethereum’s base layer. It also works with Coinbase’s best practices, enabling you to confidently on-ramp assets into Base from Coinbase Exchange, Ethereum, and other interoperable chains like Optimism.

How to Use Layer-2s to Save Money on Fees (Basic Guide)

Apart from Base, which is still in testnet, you can start using any of Polygon, Arbitrum, or Optimism to start saving money on fees. Doing so is a fairly simple process which we’ll describe in detail below.

Step 1: Decide which L2 works best for you

Now, you don’t have to pick just one L2 to use for the rest of your life, but it simplifies the process to choose one. The best way to pick which one is to check out any Dapp you already currently use, such as Uniswap or AAVE, and see which networks it’s compatible with. This can be done at the top of the app landing page, as seen in the image below for Uniswap, which can be used with Ethereum, Polygon, Optimism, Arbitrum, and more.

Step 2: Choose that network

The beauty of Ethereum L2s is that your public wallet address is the same across all of the networks. This means that when you want to use Arbitrum, you simply have to approve the connection to that network rather than Ethereum (images below). This means that as long as you already have an Ethereum wallet, you have a wallet for all L2s too. Once you’ve approved the network switch, you’re then on the new network, but your wallet address is the same. You will have to bridge or deposit tokens to the L2 from another source. 

Step 3: Bridge or Deposit Tokens to L2 Wallet

Though the wallet address is the same, the funds in the wallet aren’t the same. ETH that you hold in your original ETH wallet will not be automatically bridged to the L2 wallet. This is something you’ll have to do manually through a bridge provided by the L2 network. We’ll use Arbitrum for the example below, but the process is ostensibly the same for all of them. First, visit the bridge either directly or by following the link provided by the Dapp (image below).

Step 4: Visit and connect wallet to the bridge

Once you click to visit the bridge, you’ll then have to connect your wallet to the bridge. Choose your wallet from the list shown to you (example below).

Step 5: Approve the connection with your wallet

After you choose the wallet you want to connect, you’ll have to approve the connection to the bridge (images below).

Step 6: Choose the assets you want to bridge

After you’ve confirmed the connection, you can now start bridging assets to and from the L2. Choose the asset you want to bridge, how much of it, and which way to bridge (to L2 from mainnet or vice versa). Once you enter the amount, the summary including fees will show up on the right. If you’re satisfied, simply complete the transaction as you normally would through your wallet. Then, wait for the funds to show up on the L2 wallet.

Step 7: Start Saving Fees

That’s it! Once your funds are bridged to the L2, you can begin saving fees right away. The one caveat is that the initial gas fee to bridge assets to the L2 will be fairly high because it involves using Ethereum’s mainnet, but after that initial transaction the savings on fees will more than make up for it.

Article tags

cryptocurrency
ethereum
Fees
Evan Jones

Author

Evan entered the crypto scene in 2017, attracted to the many disruptive possibilities that blockchain could have on current world systems. He has a keen interest in decentralized services, payment processing, and viable NFT use cases such as event ticketing. He spends his days writing with his dog Kobe under his feet, if not on his lap.

Further reading

What Are Cryptocurrency ‘Bridges’? image
What Are Cryptocurrency ‘Bridges’?03/01/2023
How to Stake (And Earn) Crypto with Lido Finance image
How to Stake (And Earn) Crypto with Lido Finance01/10/2023
How to Avoid Fees When Buying Crypto image
How to Avoid Fees When Buying Crypto03/27/2023
How NFTs Are Changing the Art World image
How NFTs Are Changing the Art World05/03/2023

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