A layer 2 network in blockchain technology is a third-party protocol that integrates with an underlying layer 1 blockchain to increase transactional throughput. Layer 2 networks do this by shifting a portion of a blockchain protocol’s transactional burden to adjacent system architecture, handling the majority of the required processing capacity, only reporting back to the main blockchain to finalize its results. This keeps the base layer blockchain (layer 1) less congested and improves the scalability of the network.
The following are examples of layer 2 network solutions:
- Lighting network
The primary focus of layer 2 networks is improving the scalability and overall throughput of the blockchain. Scalability in blockchain technologies is required to compete with legacy payment systems. Blockchain networks must accommodate an exponentially growing user base and their accompanying transactions and data. Bitcoin, for example, processes between 4-7 transactions per second compared to Visa that processes approximately 1,700 transactions per second.
Layer 2 networks facilitate scalability while remaining completely separate from layer 1 networks and not changing any of its underlying blockchain protocols. They also remove the need for miner verification.
Layer 2 networks extend the functionality of layer 1 networks. Beyond increasing throughput, this can also includes reducing transaction fees and increasing the programmability of the network.
While layer 1 networks are defined by how they approach consensus, layer 2 networks are defined by how they implement scaling solutions (or how the network maps transactions back to layer 2).
These layer 2 scaling solutions under development and in use:
- Nested blockchain
- State channels