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January 11, 2022

What is Layer 2?

Today, let’s understand what Layer 2 is.

Layer 2 refers to blockchains that build on top of an existing one to improve them without having to replace them.

To understand why that is necessary, let’s take a look at Ethereum: It is the most popular blockchain supporting Smart Contracts - or “programmable money”. But transaction costs are often in the hundreds of dollars and it still only does less than 50 transactions per second. That makes it impractical for smaller purchases, for example a 10 dollar NFT.

At the same time though, it’s great to have everything happening inside the Ethereum ecosystem itself - tokens are easily exchangeable and once you buy into it, your money can move around freely. But it does so slowly and expensively.

That’s where Layer 2 comes in. Those blockchains operate “off-chain” by processing transactions more efficiently thanks to more modern concepts. To do that, they transact using their own tokens. But you can freely exchange those tokens back into Ethereum as well, because that’s what they are built and traded on. It gives you the latest technology, all while money can easily be swapped back to the token of an established blockchain.

It’s kind of like a decentralized version of putting money into your Venmo account. Once it’s there, you can send it around between Venmo users for free. And if you choose to, you can also pull it back out and send it back to your bank account.

And next time, we’ll talk about Halving and why that is a big deal for Bitcoin.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.

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