What is a Layer 2?

The meaning of Layer 2 of blockchain is a term that refers to technologies that are built on top of existing blockchain networks, allowing them to scale in terms of throughput and cost. These solutions enable the transfer of data and digital assets faster than traditional methods. Examples of Layer 2 solutions include Plasma and Lightning Network.

Plasma is a framework for scaling up blockchains by increasing their throughput capacity. It does this by creating a secondary layer composed of various side chains or child chains, which can handle transactions with lower latency and lower fees compared to the main chain. The main chain serves as an anchor point at the end of the transaction process where users can safely submit transactions without having to wait for transactions to go through all the child chains.

The Lightning Network, on the other hand, is an off-chain payment system that allows users to move money quickly and cheaply. It works by creating a network of micropayment channels between two parties connected to the main blockchain. Through this network, transactions can be processed almost instantaneously with very low fees.  This makes it useful for applications such as digital currencies and micro payments. With Layer 2 solutions like Plasma and Lightning Network, developers have much greater flexibility when it comes to designing decentralized systems that are both fast and efficient. These solutions allow blockchains to scale without sacrificing security or decentralization.   As more projects continue to develop Layer 2 solutions, we will likely see increased adoption of blockchain technology in many different industries.

Simplified Example

Layer 2 in cryptocurrency is like the rooms in a house. Just like how a house has different rooms for different purposes, like a bedroom, a living room, and a kitchen, a cryptocurrency also has different layers for different purposes. Layer 2 is built on top of Layer 0, and it allows for more complex and advanced functionality, such as more efficient and faster transactions. It's like the rooms in a house that are built on top of the foundation, like a bedroom for sleeping, a living room for relaxing, and a kitchen for cooking. Each room has its own purpose, and the same goes for Layer 2, it has its own specific functions that are built on top of the foundation of Layer 0.

History of the Term "Layer 2"

The term "layer 2" is a relatively recent addition to the lexicon of computer networking, finding its roots in the early 2000s during the evolution of Ethernet networks. The escalating complexity and congestion of Ethernet networks prompted the quest for innovative technologies to enhance scalability and performance. In response, layer 2 solutions materialized as a strategic approach to alleviate traffic from the primary Ethernet network, thereby mitigating congestion and enhancing the overall efficiency of the network.

Examples

Lightning Network: A layer 2 solution for the Bitcoin blockchain, the Lightning Network enables faster and cheaper transactions by moving them off-chain and settling them on-chain in batches.

Optimism: A layer 2 scaling solution for Ethereum, Optimism uses optimistic rollups to increase the transaction capacity of the Ethereum blockchain while maintaining its security.

Polygon (formerly Matic Network): A layer 2 scaling solution for Ethereum, Polygon aims to provide fast and cheap transactions for decentralized applications. It uses a proof-of-stake consensus mechanism to secure its network.

Related Terms

• Layer 1 Blockchain: The underlying structure of a blockchain network.

• Lightning Network: A layer two payment protocol that operates on top of Bitcoin’s blockchain network.