What is Layer 2

Layer 2 refers to a collective of scaling solutions built on top of blockchains (Bitcoin, Ethereum, etc.).

The Purpose of Layer 2

The main goal of Layer 2 is to address the scalability problem in the "blockchain trilemma"; more specifically, to increase the transaction speed (TPS, Transactions Per Second). The blockchain trilemma states that decentralized networks can only provide two out of three benefits at any given time with respect to DECENTRALIZATION, SECURITY, and SCALABILITY.

For more information about the Blockchain Trilemma, please refer to the content: What is Blockchain Trilemma?

Mainstream blockchains such as Bitcoin and Ethereum usually sacrifice scalability to build a secure and decentralized blockchain. For instance, Bitcoin and Ethereum can only handle average TPS of 5 and 15, respectively. As the demand to use Layer 1 is surging, the network becomes more congested and expensive. That is why Layer 2 comes in to scale Layer 1 today.

Mechanism of Layer 2

Layer 2 solutions work by taking over a fair amount of transactional burden from Layer 1 so that Layer 1 becomes less congested and more scalable. Remarkably, since Layer 2 solutions regularly communicate with Layer 1 by submitting bundles of transactions, they can still take advantage of the robust decentralized security of Layer 1.

Different Classifications of Layer 2

The oldest-known example of Layer 2 solutions can be the Bitcoin Lighting Network, which is a Layer 2 solution built on top of Bitcoin. But the "Layer 2" solutions widely discussed today are mainly in the Ethereum ecosystem. The Ethereum Layer 2 solutions evolve from the initial State Channel and Plasma into more advanced Optimistic rollups (Optimism, Arbitrum) and Zero-knowledge rollups (zkSync, StarkWare).

Layer 2 Projects

As of Mar 2023, there are many famous Layer 2 protocols in the crypto markets, such as Arbitrum, Stacks, Optimism, and Immutable X. You can find the list of Layer 2 protocols under TokenInsight's tag.