What is Layer 2?
Layer 2 refers to an off-chain protocol built on top of a base blockchain—known as Layer 1—designed to improve scalability and transaction speed without sacrificing the security or decentralization of the underlying chain.
To qualify as a true Layer 2, the solution must inherit the security of its Layer 1 foundation. That means transaction data is ultimately validated by the base chain, not by an independent validator set. Systems like sidechains, which use separate consensus models, are not considered Layer 2.
Layer 2s help solve blockchain scalability by offering faster, cheaper transactions while maintaining trustlessness and decentralization. They are also closely linked to Layer 0 protocols, which underpins the broader blockchain ecosystem and supports interoperability between layers.
How Layer 2 Works?
Layer 2 solutions work by processing transactions off-chain and later settling the final state or proofs back onto the base Layer 1 blockchain.
This offloading of computation helps reduce congestion and fees on the main chain, while still leveraging its security.
Most Layer 2 systems rely on two main components:
An off-chain network: This is where fast execution of transactions takes place. The implementation can vary (e.g., rollups or payment channels), but they all aim to increase throughput while reducing costs.
An on-chain smart contract: Deployed on Layer 1, it anchors the Layer 2 activity. Its roles include:
Holding and releasing user funds
Receiving cryptographic proofs from the Layer 2 network
Validating those proofs and resolving any disputes
Finalizing the verified state back on the main chain
To maintain trustlessness, Layer 2s must submit verifiable data—often in the form of cryptographic proofs—that confirm the integrity of off-chain transactions. These can be submitted proactively (e.g. ZK proofs) or reactively (e.g. in response to challenges, as in optimistic rollups).
Types of Layer 2 Solutions
Layer 2 solutions come in different forms, each offering distinct advantages and trade-offs depending on how they scale and secure blockchain operations:
Optimistic Rollups
Optimistic rollups assume all off-chain transactions are valid by default and do not require immediate validation. Instead, they introduce a "challenge period"—a window of time during which anyone can submit proof to dispute fraudulent or incorrect transactions.
Here’s how they work in practice:
Transactions are processed off-chain and bundled into a rollup.
The rollup is posted to the Layer 1 blockchain along with a state commitment.
A challenge window opens, allowing participants to contest invalid transactions.
If no fraud is detected during this window, the data is finalized on-chain.
If a dispute arises, a fraud-proof is submitted, and the incorrect transaction is reverted.
This mechanism prioritizes scalability and trust-minimization by placing verification responsibility on the community. It’s efficient in the common case—when transactions are honest—and only invokes computation during disputes.
Pros:
Inherits security from the Layer 1 blockchain
Low transaction costs
Trustless design with strong economic incentives
Cons:
Longer finality due to challenge period
Potential for centralization in sequencer roles
Depends on honest participants to detect fraud
ZK (Zero-Knowledge) Rollups
ZK rollups use cryptographic proofs—specifically, zero-knowledge proofs—to confirm the validity of transactions before posting them to the main chain.
A zero-knowledge proof allows one party to prove that a statement is true without revealing any underlying data.
Here’s how they work in practice:
Transactions are processed off-chain and bundled into a rollup.
For each batch, a zero-knowledge proof is generated to attest that all included transactions are valid.
This proof, along with minimal transaction data, is submitted to the Layer 1 blockchain.
Once the proof is verified by the Layer 1 contract, the new state is finalized without requiring individual transaction checks on-chain.
This model ensures rapid finality and robust security without relying on challenge periods, unlike optimistic rollups. Because invalid transactions cannot produce valid proofs, ZK rollups inherently prevent fraud.
Pros:
Avoids incorrect state changes through provable correctness
Fast finality and low withdrawal delays
Preserves decentralization while maintaining strong security guarantees
Cons:
High hardware and computational costs
Limited support for general-purpose applications (e.g., EVM compatibility is still evolving)
Centralization risks due to reliance on specialized infrastructure
State Channels
State channels are a Layer 2 solution that allows two or more parties to conduct a large number of off-chain transactions while maintaining the security of the main blockchain.
Instead of submitting every transaction to the Layer 1 chain, only the opening and final state are recorded on-chain, which reduces congestion and fees.
Here’s how state channels work:
Opening the Channel: The process begins by locking part of the blockchain’s state—such as a specific amount of tokens—into a multi-signature address or a special smart contract (often called a "judge contract") on Layer 1. This acts as a security deposit and reference point.
Off-Chain Transactions: Participants can now exchange signed messages that represent valid transactions, updating the current state between them without broadcasting each transaction to the blockchain. These exchanges are instantaneous and cost-efficient.
Closing the Channel: When participants decide to end their interaction, they submit the latest agreed-upon state to the Layer 1 blockchain. If there is a dispute, the judge contract resolves it based on the signed transactions.
This method enables high-speed, low-cost interactions while relying on the security of the main chain for dispute resolution and final settlement.
Pros:
Instant finality with no need to wait for block confirmations
Low transaction costs, especially over long sessions
Independent of mining or network congestion
Cons:
All parties must remain online and responsive
Not suitable for open participation or dynamic multi-user scenarios
High initial setup cost due to smart contract deployment
Sidechains
Sidechains are independent blockchains that run in parallel to a main blockchain and are connected to it through a mechanism known as a "two-way peg." This system allows assets to be transferred between the main chain and the sidechain in both directions.
Here’s how they work:
A user locks tokens on the main chain using a special smart contract.
An equivalent amount of tokens is then minted on the sidechain, making them usable in that separate environment.
When the user wants to move the tokens back, the reverse occurs: tokens on the sidechain are burned, and the original tokens are unlocked on the main chain.
Unlike other Layer 2 solutions, sidechains operate with their own consensus mechanisms and validators, which means they don’t inherit security directly from the main chain. However, this independence grants them greater flexibility.
Sidechains are ideal for experimenting with new features, processing high-risk transactions, or running applications that require different governance rules or technical optimizations.
Pros:
Customizable consensus and governance models
Easy to upgrade and adapt to new features
Compatible with the Ethereum Virtual Machine (EVM)
New users can participate without deploying new chains
Cons:
Do not benefit from the security of the main chain
Require greater trust in their own validator set
Higher setup and maintenance costs
Off-Chain Computation
Off-chain computation—also known as oracle computation—is a Layer 2 scaling method that enables computationally intensive tasks to be performed outside of the main blockchain.
Here’s how it works:
A specific portion of the blockchain’s state is locked via a smart contract on the Layer 1 chain.
The required computation is then executed off-chain, typically by an external party or oracle with sufficient processing power.
Once the task is completed, the result is submitted back to the Layer 1 network.
The smart contract verifies and integrates the result, updating the blockchain state accordingly.
This model allows developers to offload complex logic or heavy workloads—such as machine learning or data analysis—that would otherwise be too resource-intensive for the base layer. It also keeps the main chain less congested and more efficient.
Pros:
Enables high-performance, scalable dApps
Reduces on-chain costs for intensive tasks
Customizable for different use cases and applications
Cons:
No built-in guarantees around data availability
Application liveness may suffer if off-chain resources go offline
Centralization risks if computation is handled by a limited number of trusted parties
Plasma
Plasma is a Layer 2 scaling solution that improves throughput by creating a network of smaller blockchains—called "Plasma chains" or "child chains"—that operate independently of the main chain while still anchoring to it for security.
Here’s how Plasma works:
A smart contract on the main blockchain defines and manages the rules for the child chains.
Users can deposit funds into this smart contract, which are then reflected as balances on a Plasma chain.
Transactions are processed off-chain within the Plasma chain, enabling faster and cheaper execution.
Periodically, the Plasma chain commits a summary of its transactions—represented as a Merkle root—back to the Layer 1 blockchain.
If a dispute or exit is required, users can use Merkle proofs to validate the legitimacy of their transactions on the main chain.
This hierarchical structure allows each Plasma chain to operate autonomously, making the system highly scalable and suitable for high-volume or experimental applications.
However, due to its design, certain trade-offs exist, particularly in terms of usability and general-purpose smart contract support.
Pros:
Highly scalable due to parallelized child chains
Effective for private blockchains and high-risk experimentation
Segregates network usage to reduce Layer 1 congestion
Cons:
Long withdrawal periods due to fraud-proof mechanisms
Not compatible with complex or general-purpose smart contracts
Potential centralization in Plasma chain operator roles
Future of Layer-2 Solutions
As the demand for faster, more scalable blockchain infrastructure grows—driven by the rise of DeFi applications, NFTs, and Web3 adoption—Layer 2 solutions are becoming an increasingly central piece of the ecosystem.
Their ability to reduce congestion and lower fees makes them vital to the user experience on networks like Ethereum.
Solutions such as Base Chain and rollup-centric designs are gaining traction, and we can expect continuous innovation and adoption in this space. However, the future of Layer 2s isn’t without competition.
No matter which architectures dominate long-term, the broader push for scalability will persist. Whether through advanced Layer 2 frameworks, Layer 1 improvements, or a hybrid of both, the evolution of blockchain scalability is far from over—and Layer 2s will continue to play a crucial role in shaping that future.
