What is Layer 2?

Imagine if every small card payment had to go through a single checkout counter. The longer the line, the harder it gets to serve everyone. Something similar happens when many users compete at the same time for a blockchain’s limited space: fees can rise and confirmations can be delayed.

Layer 2 solutions move part of the work off the base network, Layer 1. The key point is that they use the base blockchain for the security and finality of their transactions, in different ways depending on the technology.

For example, rollups on Ethereum bundle many transactions and submit the necessary data to the base network along with, depending on their type, proofs or results that can be challenged. That way, the cost of using Layer 1 is spread across more transactions. The Lightning Network on Bitcoin takes a different approach, with payment channels between users.

Why it matters

If you send small amounts or use decentralized apps, fees directly affect whether a transaction makes practical sense. An L2 can offer lower costs and faster initial confirmation. That, however, isn’t always the same as final settlement on Layer 1.

We find it useful to separate the network from the coin. A Layer 2 doesn’t necessarily need its own token. Also, the same asset on different networks isn’t automatically available in the same wallet balance.

What to watch out for

Before a transfer, check that the recipient’s wallet or exchange supports that specific network. The same address format isn’t enough. Moving funds may require a bridge, with extra costs and risks.

Not all L2s offer the same security guarantees. Smart contract bugs, upgrades controlled by a few people and reliance on a single central sequencer that orders transactions can cause problems. Some withdrawals to Layer 1 also involve a waiting period. Finally, a sidechain with its own security mechanism doesn’t become a Layer 2 just because it connects to Ethereum.