Ethereum scales with layer 2 solutions on top of the main chain. How rollups work, and why fees came down.
When decentralized finance and NFTs took off, Ethereum became congested. Fees rose sharply, and many simple transactions became too expensive.
Instead of making the main chain faster at the expense of security, Ethereum chose to scale in layers.
Layer 1 is the Ethereum main chain itself, where security and final settlement live. Layer 2 consists of networks on top of the main chain that handle most of the activity.
Layer 2 networks regularly send a summary back to the main chain. That way they inherit Ethereum's security, but are much faster and cheaper.
The most common layer 2 solution is rollups. They bundle many transactions and post them to the main chain as one package.
Optimistic rollups assume transactions are valid, but allow a window to expose cheating. Zero-knowledge rollups use cryptographic proofs that show everything is correct straight away. Well-known examples are Arbitrum, Optimism and Base.
The original plan was to split the main chain into many parallel chains, called sharding. The plan changed, and in 2024 Ethereum instead got dedicated, cheap storage space for rollup data.
The upgrade made layer 2 transactions much cheaper. The challenge now is that activity is spread across many layer 2 networks that do not always work well together.