Blockchain & Cryptocurrency Glossary

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.

  • search-icon Clear Definitions
  • search-icon Practical
  • search-icon Technical
  • search-icon Related Terms

Layer 2 Token

1 min read
Pronunciation
[ley-er too toh-kuhn]
Analogy
Continuing the country analogy, Layer 2 tokens are like local currencies or specialized tokens used within specific districts, states, or private economic zones of the country. Transactions within these zones might be faster and cheaper using the local token, but they still ultimately rely on the national currency (Layer 1 token) and central authority (Layer 1 blockchain) for final settlement or security.
Definition
A token specific to a Layer 2 scaling solution or protocol built on top of a Layer 1 blockchain. These tokens typically have utility within the Layer 2 ecosystem, such as for paying fees on the L2, staking to secure the L2 network, or participating in L2 governance.
Key Points Intro
Layer 2 tokens support the operation and growth of scaling solutions built on base blockchains.
Key Points

Operates on a Layer 2 scaling solution built atop a Layer 1 blockchain.

Often used for transaction fees and/or staking within the L2 network.

May grant governance rights specific to the Layer 2 protocol.

Aims to provide faster and cheaper transactions than the underlying Layer 1.

Example
Optimism (OP) and Arbitrum (ARB) are governance tokens for major Layer 2 scaling solutions (Optimistic Rollups) on Ethereum. Holders can use these tokens to vote on proposals related to the future development and parameters of the Optimism or Arbitrum networks, respectively.
Technical Deep Dive
Layer 2 tokens are part of protocols designed to process transactions off the main Layer 1 chain, bundling them or using other techniques before submitting summarized or verified data back to Layer 1 for finality. The token's utility is defined by the specific Layer 2 protocol; it might be used to incentivize L2 operators (sequencers, validators), for staking in the L2 consensus or fraud/validity proof systems, or for participating in the decentralized governance of the L2 itself.
Security Warning
While Layer 2 solutions often inherit some security from Layer 1, L2 tokens are also subject to risks specific to the Layer 2 protocol, including smart contract vulnerabilities in the L2 implementation or potential centralization risks depending on the L2 design and operator. Their value is tied to the adoption and success of the specific Layer 2 network.
Caveat
The utility and success of a Layer 2 token are entirely dependent on the adoption, security, and continued development of its specific Layer 2 network. Users still typically need the Layer 1 native token to bridge assets or interact with the L2 contract on Layer 1.
Related Terms
Layer 2
Sidechain
State Channel
Gas
Governance Token
Layer 1 Token

Layer 2 Token - Related Articles

No related articles for this term.