What is layer 2?

Layer 2 refers to the additional infrastructure that is created alongside the main blockchain networks (Layer 1s) that helps in processing a larger volume of transactions and make the networks accessible to more transactions and/or users.1

Need for Layer 2

One of the biggest problems facing blockchain platforms like Bitcoin and Ethereum is scalability. This means that the ability to process more transactions every second is restricted. By adding another layer, more transactions can be conducted every second without impacting the load on Layer 1. It should be noted that Layer 1 would have to be interconnected with Layer 2, as this is essential to maintain the security of the blockchain network. Layer 1 is also the master ledger for all the transactions and is critical to update every piece of information in Layer 1. At times, Layer 1 is needed to be referred to when there are discrepancies in records within the second layer.

Layer 2 also serves as a backup channel and helps to keep the services intact when there are disruptions to Layer 1. Even when enhancements are being made to Layer 1, Layer 2 ensures continuity of service.

There are many hybrid models adopted for introducing scalability to the network. Sidechains are a combination of both layers that have all the features of Layer 1 and play the role of Layer 2.

Example

The lightning network is a Layer 2 solution offering scalability to the existing Bitcoin blockchain. This is a low-cost service that has a better availability compared to the actual Bitcoin Layer 1.2

References

1 Layer 2 blockchain PC.

2 Lightning Network Investopedia.

Please note that this article is for informational purposes only. The example above is for illustrative purposes only. Actual crypto prices may vary depending on the market price at that particular time. Alpaca Crypto LLC does not recommend any specific cryptocurrencies.

Cryptocurrency is highly speculative in nature, involves a high degree of risks, such as volatile market price swings, market manipulation, flash crashes, and cybersecurity risks. Cryptocurrency is not regulated or is lightly regulated in most countries. Cryptocurrency trading can lead to large, immediate and permanent loss of financial value. You should have appropriate knowledge and experience before engaging in cryptocurrency trading. For additional information please click here.

Cryptocurrency services are made available by Alpaca Crypto LLC ("Alpaca Crypto"), a FinCEN registered money services business (NMLS # 2160858), and a wholly-owned subsidiary of AlpacaDB, Inc. Alpaca Crypto is not a member of SIPC or FINRA. Cryptocurrencies are not stocks and your cryptocurrency investments are not protected by either FDIC or SIPC. Please see the Disclosure Library for more information.

This is not an offer, solicitation of an offer, or advice to buy or sell cryptocurrencies, or open a cryptocurrency account in any jurisdiction where Alpaca Crypto is not registered or licensed, as applicable.