Bitcoin’s blockchain offers final settlement for bitcoin at the cost of relatively low throughput. The Bitcoin network averages between 3-7 transactions per second. This is obviously insufficient for hosting all of the world’s financial transactions, as Bitcoin intends to do. While larger settlements can still be settled to the blockchain to achieve maximal security, smaller transactions in need of lower security can be executed “off-chain” by another service or protocol, called a layer. Layered solutions can trade lower security for higher throughput and cheaper fees.
Bitcoin developers prefer that innovation and scaling takes place on layers on top of Bitcoin in order to separate the security risks that come with software innovation from affecting Bitcoin’s blockchain.
These layers have analog examples in the legacy financial system: credit cards, Venmo, and PayPal are all layered on top of a core banking system of wire transfers and the ACH system. Before the gold standard was abandoned, physical cash was a layer on top of the base money of gold.