Layer 2 is the generic name given to the space of projects which are dedicated to scaling the use of the Ethereum blockchain. As we know, Ethereum is a decentralised, peer-to-peer blockchain network. However, the very properties which make Ethereum open and trustless, also get in the way of it being very fast or serving many people at the same time. This is because it is much harder to improve the network’s performance when it relies heavily on a large number of entities (i.e. miners) being involved in validating it. In practice, the Ethereum 1.0 network can currently support only about 30 transactions per second, which is much smaller than what a large-scale system serving the public would require.
Layer 2, then, focuses on solutions which are capable of satisfying transactions off the main Ethereum blockchain. To retain the security properties, these solutions offer novel mechanisms which still use the main chain to prove their validity. Examples of Layer 2 solutions in development include Rollups, State Channels, Plasma and Sidechains.