Layer 2 Vs. Layer 3 Networks
LAYER 2 NETWORKS
A switch works with MAC addresses at layer 2 of the OSI 7 layer model. Devices used on a Layer 2 Ethernet network include network interface cards, hubs, bridges and switches. Ethernet devices use 'burned in' MAC addresses to identify each host. These addresses are attached to network interface cards and cannot be changed. The address of a computer can only be changed if the network interface card is changed. Layer 2 networks are connected together using hubs, bridges and switches. Hubs take each frame that is received and send duplicate frames simultaneously out all other ports. Bridges forward broadcasts between two connected networks until they have located all hosts. Switches forward broadcast traffic only when it doesn't know where a host is. None of these devices have to disassemble or reassemble data, only forward it. Because nothing is done to the data along the way, layer 2 networks are often considered to be 'faster' than a layer 3 network.
LAYER 3 NETWORKS
A Layer 3 switch is a high-performance device for network routing. A router works with IP addresses at layer 3 of the model. Layer 3 networks are built to run on on layer 2 networks. In an IP layer 3 network, the IP portion of the datagram has to be read. This requires stripping off the datalink layer frame information. Once the protocol frame information is stripped, the IP datagram has to be reassembled. Once the IP datagram is reassembled, the hop count has to be decremented, the header checksum has to be recalculated, a lookup for routing must be made, and only then can the IP datagram be chopped back up and inserted into frames and transmitted to the next hop. All of this takes extra time.
Layer 2 networks forward all traffic, especially ARP and DHCP broadcasts. Anything transmitted by one device is forwarded to all devices. When the network gets large enough, the broadcast traffic begins to create congestion and decreases network efficiency.
By contrast, layer 3 devices restrict broadcast traffic such as ARP and DHCP broadcasts to the local network. This reduces overall traffic levels by allowing administrators to chop networks into smaller parts and restrict broadcasts to only that sub-network. This means there is a limit to the size of a layer 2 network. A layer 3 network, prperly configured, can grow to any size.