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People often talk about building a protocol “on top of” the bitcoin blockchain. Those same people often call this building a layer 2 protocol.

To be clear, “on top of” is clearly metaphorical language here (this is a visuospatial metaphor for what is a technical abstraction). Can someone explain what is actually happening when someone says that? Feel free to use the example of a well known application.

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This layer 2 wording is an analogy/comparison to the network TCP/IP stack. Basically the TCP/IP stack allowed for networking machines as the foundational layer (or the layer 1 infrastructure). And on top of this infrastructure came the protocols, which are commonly used today (http, mail, ...). When comparing to the bitcoin world, the idea is that bitcoin as per today is the "payment infrastructure", and on top of it there will be protocols for lightning (micro transactions), schnorr sigs, smart contracts, ... So the underlying bitcoin network has proven to be reliable, and serves as a utility for future setups on top.

There is also a certain euphoria when people talk like this, hoping the future will reduce/avoid today's limitations with these "layer 2" protocols. Exciting times ahead!

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