Layer 2
In short: Layer 2 refers to scaling solutions built on top of a Layer 1 blockchain. They process transactions away from the main chain and then settle the results…
Layer 2 refers to scaling solutions built on top of a Layer 1 blockchain. They process transactions away from the main chain and then settle the results back to it, aiming to keep much of its security while making transactions faster and cheaper.
Why it matters
Popular base chains can become congested, which pushes fees up and slows confirmations, and Layer 2 networks ease this by handling many transactions off the main chain and settling them in bulk, so each user pays a small share of the cost. Common designs include rollups, which post compressed transaction data to the Layer 1 and rely on fraud proofs or zero-knowledge proofs to keep it honest, and payment channels such as Bitcoin’s Lightning Network. For users, the practical point is that the same token can exist on several networks. When depositing to or withdrawing from an exchange, the selected network must match on both sides, or funds can be delayed or lost.
Example
Instead of paying main-chain fees for every small transfer, a user moves funds to a rollup through its bridge. On the rollup, transfers confirm quickly and cost little. From time to time, the rollup posts a batch of these transactions to the Layer 1, where they are secured by the base chain. Moving funds back goes through the bridge again and, depending on the design, can take longer.