An independent blockchain acting in concert with Bitcoin or Ethereum, which retroactively became known as a "Layer 1 chain" or "main chain." Layer 2 chains process new transactions faster while reducing the load on Layer 1 and typically taking much lower fees.
A connection (channel, bridge, etc.) is opened between Layer 1 and Layer 2, and at periodic intervals, a summary of Layer 2 transactions is added to Layer 1 for a permanent record. A major consideration of Layer 2 chains is how transactions are validated before they are "cast in concrete" on the main chain. New Layer 2 solutions are being devised all the time, making this is a major topic in the crypto world. See blockchain
Although sidechains and Layer 2 chains are often considered synonymous, their similarity is that they function as independent networks with a channel to Layer 1. A sidechain does however have its own validators and consensus method for adding blocks. See sidechain
and Polygon blockchain
Like sidechains, plasma chains have their own consensus algorithm and create blocks of transactions. At a fixed interval, a compressed representation of each block is committed to a smart contract on Ethereum.
State Channels (Payment Channels)
Crypto is deposited in a smart contract on Ethereum, and a channel is opened between both parties. As payments are made, signed tickets are made on Layer 2. When completed, a ticket is signed on Layer 1. State channels can be bi-directional and also handle another party if channels have already been opened. Bitcoin's Lightning chain uses payment channels (see Lightning Network
Rollup chains send snapshots of their blocks to Layer 1. Optimistic Rollups take seven days to confirm, during which time a transaction can be disputed. Zero-Knowledge Rollups (ZK Rollups) hold funds in a smart contract. After proof of validity is accepted, transactions are confirmed and the funds are available. See zero-knowledge proof
and Optimistic Ethereum
Layer 2 Solutions
As Bitcoin and Ethereum become more popular, they must scale up to handle more transactions. Layer 2 chains provide a solution by enabling thousands of small-value transactions to be stored as one record on the main chain, thus keeping Layer 1 chains from growing too large and becoming too cumbersome. For Bitcoin's Layer 2 network, see Lightning network