What is Layer 2? (And Why Your ETH Lives on 5 Different Chains)

You bought ETH on Ethereum. Simple enough.

But then someone told you to "bridge to Arbitrum for lower fees." Your favorite DeFi app launched on Base. A friend is using Optimism.

Now you've got ETH on Ethereum, Arbitrum ETH, Base ETH, and Optimism ETH.

Wait... what? Aren't these all just ETH?

Yes and no. Welcome to Layer 2.

The Ethereum Congestion Problem

Ethereum is the most popular smart contract blockchain. It's where DeFi was born. But there's a problem:

It's expensive and slow.

Gas fees: $5 to $100+ per transaction during busy times
Speed: 12-15 seconds per transaction, ~15 transactions per second
Congestion: Popular NFT drops can send fees to $500+

For context: If you want to swap $100 of USDC for ETH on Uniswap during peak hours, you might pay $40 in gas fees. That's a 40% fee on your swap.

This pricing structure works fine if you're moving $100,000. But for regular users? It's prohibitive.

Enter Layer 2: Ethereum's Fast Lanes

Layer 2 (L2) solutions are separate blockchains built on top of Ethereum (Layer 1 / L1). Think of them as express lanes on a highway:

Layer 1 (Ethereum): The main highway. Secure but congested.
Layer 2 (Arbitrum, Base, etc.): Express lanes. Fast, cheap, but rely on the main highway for security.

How Layer 2 Works

Instead of processing every transaction on Ethereum, L2s:

Process transactions off-chain (on their own network)
Bundle thousands of transactions together
Post a summary to Ethereum for security

The result:

✅ Transactions execute in <1 second
✅ Gas fees drop to $0.10 - $2
✅ Still secured by Ethereum's validator network

The Real-World Difference

Let's compare the same transaction on different chains:

Action	Ethereum L1	Arbitrum L2	Base L2
Swap $100 USDC → ETH	$35 gas	$0.80 gas	$0.40 gas
Send ETH to friend	$8 gas	$0.30 gas	$0.15 gas
Approve + LP deposit	$75 gas	$1.20 gas	$0.60 gas

That's a 50x-100x reduction in fees.

The Major Layer 2 Networks

Not all L2s are the same. Here are the big players:

🔵 Arbitrum

Type: Optimistic Rollup
Use case: General-purpose DeFi
Ecosystem: GMX, Radiant, Camelot
TVL: ~$3B (largest L2)
Bridge: bridge.arbitrum.io

🔴 Optimism

Type: Optimistic Rollup
Use case: General-purpose DeFi, foundation for OP Stack
Ecosystem: Velodrome, Aave, Synthetix
TVL: ~$1B
Bridge: app.optimism.io/bridge

🔵 Base

Type: Optimistic Rollup (OP Stack)
Use case: Social apps, consumer crypto
Built by: Coinbase
Ecosystem: Aerodrome, friend.tech, Farcaster
TVL: ~$2B
Bridge: bridge.base.org

🟣 Polygon zkEVM

Type: Zero-Knowledge Rollup
Use case: High-frequency DeFi, gaming
Ecosystem: QuickSwap, Gamma
TVL: ~$200M
Bridge: portal.polygon.technology

⚡ zkSync Era

Type: Zero-Knowledge Rollup
Use case: Privacy-focused DeFi
Ecosystem: SyncSwap, Mute
TVL: ~$150M
Bridge: bridge.zksync.io

[Visual suggestion: Diagram showing Ethereum L1 as foundation with L2s built on top]

Two Types of Layer 2

Optimistic Rollups (Arbitrum, Optimism, Base)

How they work:

Assume transactions are valid by default ("optimistic")
Allow 7-day challenge period for fraud proofs
Fast and cheap, but withdrawals back to L1 take 7 days

Best for: General DeFi, gaming, social apps

Zero-Knowledge Rollups (zkSync, Polygon zkEVM, Starknet)

How they work:

Use cryptographic proofs to verify transactions
No challenge period needed
More complex tech, but theoretically more secure

Best for: Privacy, high-security applications

For most users, the difference doesn't matter day-to-day. Both are fast and cheap.

So Why Does Your ETH Live on 5 Different Chains?

Here's a typical DeFi user's journey:

Buy ETH on Coinbase → ETH on Ethereum L1
Bridge to Arbitrum for DeFi → ETH on Arbitrum
Bridge to Base for a new app → ETH on Base
Keep some on Optimism for yields → ETH on Optimism
Original stack still on Ethereum → ETH on Ethereum

Each chain has its own ecosystem. The best yields, newest apps, and unique opportunities are spread across multiple L2s.

You're not buying different assets. You're moving the same ETH to different networks.

The Tax Implication: One Asset, Multiple Chains

Here's where it gets tricky for taxes:

From a tax perspective, moving ETH from Ethereum to Arbitrum is NOT a sale.

It's a transfer. Your cost basis stays the same.

Example:

Buy 1 ETH on Ethereum for $2,000 (your cost basis)
Bridge to Arbitrum (still 1 ETH, still $2,000 basis)
Sell on Arbitrum for $2,500
Taxable gain: $500 (not $2,500)

But here's the problem most tax software faces:

They see these as separate events:

"Sent 1 ETH" on Ethereum → Software thinks you disposed of ETH
"Received 1 ETH" on Arbitrum → Software thinks you acquired new ETH with $0 basis
"Sold 1 ETH" on Arbitrum for $2,500 → Software calculates $2,500 gain

Result: You're taxed on $2,500 instead of $500. That's phantom income.

Why Traditional Tax Software Fails at Layer 2

Most crypto tax platforms treat each blockchain separately:

❌ Can't link send on Ethereum to receive on Arbitrum
❌ Don't have bridge contract databases
❌ No cross-chain transaction matching
❌ Result: Phantom taxable events

This forces users into hours of manual edits to connect bridge transactions.

How Moonscape Handles Multi-Chain Tracking

Moonscape is built for the multi-chain world:

✅ Tracks all major L2s: Arbitrum, Optimism, Base, Polygon, zkSync, and more
✅ Bridge contract database: Recognizes 40+ official and third-party bridges
✅ Auto-matches cross-chain transfers: Links send → receive with 95%+ accuracy
✅ Preserves cost basis: Your original basis carries across chains
✅ Unified portfolio view: See all chains in one dashboard

Missing Wallet Detection

Here's a unique Moonscape feature:

If we see you bridge ETH to Arbitrum but you haven't imported an Arbitrum wallet, we alert you:

🔵 Bridge Detected
You bridged to Arbitrum but haven't imported an Arbitrum wallet.
[Import Arbitrum Wallet →]

One click, and we sync your Arbitrum transactions, match the bridge, and preserve your cost basis.

No other platform does this.

The Bottom Line

Layer 2 makes Ethereum usable again. Instead of $50 gas fees, you pay $0.50.

But it creates complexity:

Your assets live on multiple chains
Each chain needs separate tracking
Bridge transfers must be linked correctly
Cost basis must carry over

For DeFi users, multi-chain portfolio tracking isn't optional anymore. It's essential.

Ready to Track Your Multi-Chain Portfolio?

Import all your wallets across Ethereum and L2s. Moonscape automatically:

Detects bridge transactions
Matches cross-chain transfers
Preserves cost basis
Calculates accurate tax reports

Try Moonscape →

Built for people who'd rather track than guess.
Moonscape — your crypto, your taxes, fully decoded.