Layer 2 refers to the second layer of a blockchain system, which is built on top of the existing first layer or “Layer 1”. Layer 2 protocols are designed to improve scalability by moving certain transactions off-chain and onto secondary networks that can process more complex computations at faster speeds than the primary network. This allows for higher levels of throughput and improved performance compared to Layer 1 solutions alone.
The most common type of Layer 2 solution is an off-chain scaling protocol such as Lightning Network (LN) or Plasma—both enable users to open payment channels between two parties without having to wait for every transaction to be confirmed on the main blockchain. These protocols also reduce fees associated with sending money as there is no need for miners or validators to confirm each transaction.
Other types of Layer 2 solutions include sharding, where data is split across multiple blockchains; state channel networks, which create private channels between nodes in order to facilitate payments without the need for a third party intermediary; and sidechains, which are separate blockchains linked together through bridges so that data can move freely from one chain to another.
Each solution has its own advantages and drawbacks depending upon your needs but all have one thing in common: they provide faster transaction times while still remaining secure within the larger blockchain ecosystem. From an investor’s point of view this means increased liquidity and faster access when it comes time to make trades or transfers quickly.
