Layer 2 refers to an additional framework or protocol constructed above an established blockchain network, commonly known as Layer 1. Layer 2 solutions are designed to address scalability and performance issues that may limit the capacity and efficiency of the underlying blockchain. Layer 2 solutions help increase transaction speed and lower fees by reducing the workload on the Layer 1 blockchain. They achieve this by processing a group or batch of transactions off-chain or through a separate network, and then periodically reconciling the final outcome on the Layer 1 blockchain.
Various Layer 2 scaling solutions have been developed, each with its own approach. Examples include payment channels like the Lightning Network for Bitcoin and state channels for Ethereum, as well as sidechains and rollup solutions. These Layer 2 solutions facilitate quicker and more cost-effective transactions while retaining the security and decentralized nature of the Layer 1 blockchain.
By moving a significant portion of transactions off-chain or to a secondary layer, Layer 2 solutions help to alleviate congestion, reduce network load, and improve the overall scalability of the blockchain network. They offer a way to enhance the user experience, expand the capacity of the network, and enable new use cases and functionalities in the blockchain ecosystem.