Layer 2 tokens like 0xPolygon's $MATIC and Immutable’s $IMX have shot up so far this year as blockchain users flock to the networks that are built on an underlying layer 1 network like Ethereum.
Let’s Talk About Crypto Protocol Layers and Why Investors Must Examine Them
Some of those candidates are, however, intrinsically tied to the Bitcoin and Ethereum blockchains, borne out of the need to enhance their capabilities. Bitcoin and Ethereum are known as layer 1 protocols, and these attempts to scale and expand them are called layer 2s . Bitcoin lets people engage in peer-to-peer transactions; the price of BTC rises with demand for that. Ethereum and similar L1 protocols grant people access to smart contracts, decentralized finance protocols and, eventually, stuff we can’t currently envision; ETH and its peers ride along with that.
So, if a layer 1 protocol is a room people are rushing to get into, imagine a long line at the door and skyrocketing price of admission. That’s where layer 2s come in. They act like an overflow room at a convention. If you can’t get into the main auditorium to see the hot keynote speaker, you can get into a side room with a TV screen showing their speech and meet with other attendees.
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