L1s, L2s and side-chains are trying to solve the scalability problem in crypto.
Ethereum's market cap is $390+ billion. Its decentralised nature limits the number of transactions it can process - a maximum of of 15 transactions per second (TPS). In comparison, Visa can handle 45,000 TPS. Due to high demand and low TPS, transaction costs (gas fees) are high.
L1's, L2's and side-chains are trying to solve this. They're trying to balance decentralisation, security and scalability - commonly called the Blockchain Trilemma.
Layer 1: competes
An L1 protocol refers to a blockchain.
Any independent blockchain is called an L1. Alternatives to Ethereum include Solana, Avalanche and Terra. L1's aim to increase scalability by making fundamental changes to the blockchain. For example, increasing the amount of data that can be contained within a 'block'. Some argue that this makes them less secure.
Layer 2: compliments
L2s achieve scalability by building on top of Ethereum.
The objective is to achieve scalability without sacrificing security. They roll up transactions. Instead of processing 1,000 Uniswap transactions directly on Ethereum, the computation is delegated to an L2. After processing, the L2 submits a single transaction to Ethereum. Arbitrum and Optimism are examples of L2s.
Side-chains: compliments & competes
Side-chains are distinct blockchains that are compatible with Ethereum.
They're like L2s but have their own token and therefore compete with Ethereum. Polygon is the best example of a side-chain.
Learning about a protocol is critical before investing or choosing one for your project, this is hopefully a start.