Layer 2 Blockchain Meaning

Dec 27, 2023 | Updated Dec 27, 2023

A layer 2 blockchain is a secondary network built on top of an existing blockchain network. It is a solution to extend the capabilities and performance of the base network.

What is a Layer 2 Blockchain?

A layer 2 network is a secondary protocol that operates on top of an underlying blockchain as a scaling solution. The underlying protocol is a layer 1 blockchain, which constitutes the infrastructure and consensus mechanism on which these secondary networks and other applications operate.

But what’s the need for a secondary layer?

So layer 1 protocols are required to process more transaction data as the number of users in the network increases. However, most layer 1 networks, such as Ethereum and Bitcoin, have a limited capacity to process transactions per second (TPS). For instance, Ethereum processes up to 29 TPS. This leads to network congestion and increased transaction fees as their user base grows. In return, it hinders their long-term growth and widespread adoption.

Typically, layer 2 solutions solve the limitations of layer 1 by enhancing its overall performance or operational capabilities. This includes improving the underlying network’s transaction throughput, scalability capacity, and transaction costs. Since they are built on top of another blockchain, they inherit the security of the protocol they operate on.

How Do They Work?

Layer 2 solutions are composed of two major parts:

The network to which transaction processing is abstracted.
A smart contract on the layer 1 solution.

The smart contract on layer 1 is responsible for holding and releasing the cryptocurrency sent to the secondary network. It also provides verifiable proof (from layer 2) to the underlying blockchain regarding the integrity of the requested state change, validates it, absolves any disputes, and finalizes transactions.

As processes and transactions take place outside the main chain, layer 2s can be regarded as off-chain scaling solutions. By abstracting transactions away from on-chain, layer 2 solutions enable high throughput. In summary, the main chain delegates most of its operations to the layer 2s. So layer 2s are designed to perform thousands of transactions per second while inheriting the security of layer 1s.