Layer 2 (L2) is a term used to describe a protocol built on top of a Layer 1 (L1) blockchain. L2 blockchains are primarily used for scaling L1 blockchains to help them function more efficiently during times of heavy traffic.
Popular L1s: Bitcoin & Ethereum
Why is Layer 2 important?
Layer 2 chains help increase transaction speed and lower transaction cost, bringing better scalability to blockchains they're built on top of. Blockchains that experience periods of heavy usage are most likely to suffer from scalability issues.
The most obvious example of this is when sending a regular Ethereum transaction can cost hundreds of dollars in fees.
A solution to this problem comes through the use of Layer 2 blockchains built on top of Ethereum.
How does Layer 2 work?
We just learned that the framework of Layer 2 blockchains is built upon existing chains (usually Bitcoin or Ethereum) to help with:
Increasing transaction speed
Lowering transaction fees
So how is this accomplished?
Layer 2: Transactions occur on L2 instead of L1 to increase scalability
Layer 1: Data and proof of transaction resides on the Layer 1 chain to maintain security
What type of projects does L2 benefit?
Projects/applications with high transaction volume are most likely to benefit from being built on Layer 2.
Gaming is one of the biggest beneficiaries of using Layer 2 chains.
Think about it - If a game was built on Ethereum it would cost players upwards of $10 (very conservative estimate) to do simple tasks like approve in-game transactions.
Layer 2 is chosen for games so that these microtransactions cost only a few cents while maintaining the security of Ethereum. These transactions occur off the main-chain while their data and proof of transaction resides on Layer 1.
How do I move my crypto from L1 to L2? What is bridging?
The act of moving tokens from Layer 1 to Layer 2 (& vice versa) is called bridging. Bridging requires the use of an exchange called a bridge. Bridges allow users to exchange tokens from one network to another, usually for a small fee.
Joe wants to move his $ETH from the Ethereum blockchain to Polygon
Joe deposits 1 ETH (+ fees) into the bridge
Once Joe confirms the transaction, the bridging process begins
Joe sends: 1 ETH (Ethereum network) + fees
Joe receives: 1 ETH (Polygon network)
Now Joe is able to use ETH when interacting with apps/games built on Polygon
Where can I bridge my assets?
My favorite bridge to use is Anyswap. It's compatible with almost any chain you can think of and has a ton of tokens to choose from. I look at Multichain as the Uniswap of bridges.
Some L2 chains have require their native token to pay gas fees, others do not. Be aware of this when swapping chains to make sure you have the correct tokens to pay gas fees.
Polygon is a Layer 2 solution built on top of Ethereum
When using Polygon, transaction fees are paid in MATIC rather than ETH
Arbitrum is a Layer 2 solution built on top of Ethereum
Arbitrum doesn't have a native token, it uses ETH for transaction fees
To make ETH usable on Arbitrum's network, it must first be bridged from Ethereum to Arbitrum
How do I add new chains to Metamask?
One of the most annoying parts about using multiple chains is having to find and add each chain's network that you want to use. Chainlist makes this easy by compiling all your options in one place so you don't have to waste time looking for each one individually.
Here's their full list of chains to choose from: https://chainlist.org/