Layer 2 on Ethereum is a set of protocols that enables scalable, decentralized applications to be built on top of the Ethereum blockchain. These protocols work by creating a second-layer network on top of the Ethereum blockchain that can handle a much higher volume of transactions than the base layer.
This allows for a much more scalable and efficient Ethereum network, which is essential for the growth of the ecosystem.
There are a few different Layer 2 protocols being developed on Ethereum, each with their own advantages and trade-offs. The most popular protocols are Plasma, State Channels, and Optimistic RollUPS. Plasma is the most advanced and scalable of these protocols, but it is also the most complex to implement.
State Channels are simpler to implement but have lower scalability than Plasma. Optimistic RollUPS are somewhere in between, with good scalability but more complex than State Channels.
No matter which Layer 2 protocol is used, they all have the potential to dramatically increase the scalability of Ethereum and enable it to handle thousands or even millions of transactions per second. This is a critical development for Ethereum as it looks to scale in order to meet the demands of its growing user base and applications.