You might of heard of Layer 2 networks in crypto.. But what actually is it?

As crypto grows more and more popular, we've been hearing a lot about 'L2 networks' or 'L2 scaling solutions'. L2 is simply short for Layer 2, which is just one of many layers in the world of computer networking. Layer 1 refers to the core networking infrastructure that is the foundation of everything, such as cabling, routers, and IP addresses. Layer 2 is the additional protocols built on top of this to improve communications, provide services, etc.

In the context of crypto, the original, underlying blockchains like Bitcoin and Ethereum are Layer 1 protocols. For many years these were the only layers but recently, developers have started building L2 protocols on top of L1's to improve the crypto ecosystem. The most popular of these is the Lightning Network, an L2 solution built on Bitcoin to provide faster, cheaper payments.

The Lightning Network works by creating secondary 'off-chain' payments channels between two entities. This means it can conduct transactions without always interacting with the main Bitcoin blockchain, which would be 'on-chain'. The advantage is that payments are very quick and cheap because they don't need to wait for confirmations on each and every transaction. The Lightning Network periodically lumps all these small transactions into one big transaction and then sends the information 'on-chain'.

Ethereum Layer 2

Another popular L2 scaling solution is Ethereum Plasma, a slightly different protocol that uses 'sidechains' rather than separate channels. Sidechains are smaller copies of the main chain that run in parallel with it but can be programmed to deliver specialized services. In this way, users can build unique systems that run 'on Ethereum' without altering the core Ethereum chain.

Crypto Curious podcast

We go in-depth on L2's on Ethereum in particular in our Ethereum episode. Give it a listen here.