Glossary

A Layer 2 blockchain is a blockchain that acts as infrastructure, runs parallel to another blockchain like Bitcoin or Ethereum, and supports systems that require high transaction throughput.

Scalability is defined as the capability of a system, network or process to handle a growing amount of work, activity or transactions, usually measured in transactions per second (TPS). For blockchain developers, it’s ideal that massive scale can be achieved without compromising on security. However, the more popular blockchain gets and the higher the number of transactions that need to be processed, the more difficult this process becomes.

It's easy without knowing about the technicalities behind the design of blockchain networks to simply think of it all as one massive distributed ledger system. However, there are some fundamental differences between public and private blockchains that we need to know about in order to understand how Layer 2 blockchains work.

A Layer 2 blockchain is a blockchain that acts as infrastructure and runs in parallel to another blockchain, like Bitcoin or Ethereum. A Layer 2 solution enables a high number of transactions per second (TPS) by using the primary chain(s) for final settlement only.

For example, someone who uses digital currency needs to wait until a transaction is final before they can spend their money again. Layer 2 systems enable this scalability by conducting transactions off-chain, and then settling on the primary chain.

As previously mentioned, legacy networks like Bitcoin and Ethereum aren't able to process thousands of TPS like newer systems. This can be detrimental to the long-term growth of these networks. The term "Layer 2" refers to solutions that are being proposed to solve this problem.

Some of the most widely known Layer 2 scaling solutions include:

These are sets of agreements between users that enable them to transact at a high scale. The transactions only need to be settled on the primary chain (Layer 1 or base blockchain) once the channel is closed.

Sidechains are blockchains which are linked to the primary blockchain in some way. They enable high-speed transactions between multiple blockchains while being secured by the underlying network.

A nested blockchain is essentially a second-layer blockchain that runs on top of another blockchain. Nested blockchains provide additional functionality while leveraging the security of the underlying blockchain.

While Layer 2 solutions definitely offer considerable advantages with regard to transaction speed, there are some drawbacks to be aware of before you choose a particular solution.

For one, they require users to deposit their funds with an untrusted third party. In the case of a state channel, this is a single party that facilitates transactions between all channels opened on top of it.

In addition, there's always going to be a degree of centralization involved with Layer 2 scaling solutions, since they use trusted counterparties to pre-validate transactions before committing them on the primary chain.

Layer 2 scaling solutions provide an immediate solution to the scalability problem that's currently plaguing blockchain networks, and they may even be the basis for all future blockchain applications. The debate will rage on about how decentralized these systems can be while using them in conjunction with Layer 1 Blockchains.

If you want to know more about the differences between Layer 1 and Layer 2 blockchains, you can read our article 

Layer 2 Blockchain

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