Understanding Layer 2 Protocols

Layer 2 refers to protocols built on top of the Bitcoin blockchain (L1) to solve speed, cost and scalability issues. However, a true L2 solution must improve blockchain throughput without compromising security. This means funds held in an L2 should be as secure as those on the blockchain and should not require users to trust additional parties with control over their funds. Within that context, two types of protocols qualify as genuine L2s: payment channels and rollups.

The Lightning Network, the best-known payment channel, enables fast, cheap Bitcoin transactions while maintaining security. Born of a white paper published in 2016, the widely adopted protocol can support a million transactions per second. Rollups, which come in optimistic and zero-knowledge varieties, processes transactions off-chain and then posts compressed data back to the main chain. Even if all rollup operators turned malicious, users can still safely withdraw their funds to the main chain, which is a crucial feature that distinguishes true L2s from other solutions.

L2s like the Lightning Network are very effective, but not every protocol or platform that markets itself as an L2 deserves the label. Sidechains, for instance, are separate blockchains with their own consensus mechanisms that connect to the main chain through a bridge, typically controlled by a group of custodians. This creates a weakness: Users must trust these custodians not to steal their funds. The trust requirement compromises the core security of the base layer and makes sidechains fundamentally different from true L2s.

The confusion around L2 terminology isn't just academic – it has real implications for user safety and industry development. When users deposit funds into what they believe is an L2, they should understand exactly what security guarantees they're getting. Marketing a sidechain as an L2 blurs this crucial distinction, and yes, several fintech companies do it. They might argue that they're simply broadening the definition of an L2, but that misses the point, which is…

Bitcoin is the most secure and efficient financial infrastructure ever created, and a defining trait of L2s is their commitment to protecting that infrastructure for users.