Layer 2
Layer 2s are cryptoassets built on top of Layer 1 blockchains to help them overcome the scalability trilemma which postulates that blockchains can achieve 2 out of the 3 between being secure, scalable, and decentralized.
Layer 2 solutions often focus on scalability. Increasing transaction volumes by operating with less security than the Layer 1 chain they are built on. They achieve this in two ways.
By processing transactions faster and at a lower cost. Transactions are processed more efficiently because security is less robust. Layer 2 chains are comfortable compromising on security because for critical transactions the Layer 1 chain they are built can still be used.
They usually are less decentralized as well. Which speeds up the throughput of transactions on the blockchain by decreasing the time needed to reach consensus. This can be an intentional design choice or the unsurprising outcome of being a Layer 2 chain in the first place.
Some Layer 2’s are designed to limit nodes so consensus can be achieved faster. In other cases there is no artificial limit to decentralization.
Since Layer 2 chains are built on top of an existing and presumably more popular network though. They tend to have fewer operating nodes that need to reach consensus on state than the Layer 1 chain they are built on.
Examples of Layer 2 solutions are the Lightning Network for Bitcoin and Polygon for Ethereum.
The Lightning Network is built to extend Bitcoin’s functionality to support transactions with low security requirements. It achieves this through state channels.
State channels are optimized for low dollar high volume payments across the Lightning network. These payments are grouped together on the Lightning network for periodic settlement back to Bitcoin. Increasing throughput as an alternative route for transactions that do not make sense taking place on the main chain.
In contrast to the Lightning Network. Polygon is a technology stack designed to help Ethereum scale. While it does support a sidechain with its native token Matic. It has also built a wide variety of tools to help others deploy applications on top of Ethereum.
Further Reading Layer 2
Layer 2 Blockchain Technology: Everything You Need to Know