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Definition: Layer 2 blockchain

An independent blockchain acting in concert with Bitcoin, Ethereum or other major chain, which retroactively became known as "Layer 1 chains" or "main chains." 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 only similarity is that they function as independent networks with an interface to Layer 1. Like a Layer 1 chain, a sidechain has its own validators and consensus method for adding blocks. This means it is viable only if a sufficient number of validators are on board and its consensus mechanism is secure. See sidechain, consensus mechanism and Polygon blockchain.

Plasma Chains
Like sidechains, plasma chains have their own consensus algorithm and create blocks of transactions. Plasma provides a framework for building Layer 2 chains on Ethereum. At a fixed interval, a compressed representation of each block is committed to a smart contract on Ethereum.

State Channels (Payment Channels)
With state channels, crypto is deposited in a multi-signature smart contract on Layer 1, and a connection is opened between two parties. Payments are made on Layer 2, and when completed, a ticket is signed on Layer 1. State channels can be bi-directional and also handle another party if channels have previously been opened. Bitcoin's Layer 2 Lightning chain uses state channels (see Lightning Network).

Rollup Chains
Rollups accumulate transactions, and at some interval, a summary of the transactions is "rolled up" into a cryptographic proof and stored on the main Layer 1 chain. Optimistic Rollups assume people are honest but transactions can be disputed (see Optimism). Zero-Knowledge Rollups (ZK Rollups) provide proof without divulging every detail (see zero-knowledge proof).

Layer 2 Solutions
As Bitcoin and Ethereum became more popular, Layer 2 chains were developed to handle thousands of small-value transactions and store them as summaries on the main chain. This also keeps Layer 1 chains from growing too large and cumbersome.