Does ZFS cache Compressed or Uncompressed data in a ZFS file-system with compression turned on?
I asked Richard Elling, ex-sun ZFS engineer this question. He told me L2ARC is uncompressed, just like the ARC is uncompressed.
Sorry, I can't provide documentation or specifications. My only proof is that one of the guys who helped design ZFS told me in person when I met him last week. :)
Today the L2ARC can be compressed with LZ4, the ARC is still uncompressed. More information is available on the OpenZFS website -> http://open-zfs.org/wiki/Features#l2arc_compression
Cached data in ARC or L2ARC is always uncompressed. Period. Otherwise every read from ARC or L2ARC would have corresponding CPU overhead, which with some algorithms could be significant (I'm looking at you bzip2). Assuming compression=yes on your filesystem(s), data on pool disks and the ZIL (if applicable), will always be compressed.
You are correct, when storing data that compresses well and a system with plenty of CPU but limited IO might preform better with compression enabled. This is not a unique characteristic of ZFS, you'll find plenty of references to this with regards to enabling compression on NTFS or other filesystems.