A settlement layer is the base layer on a blockchain) which validates transactions. Other sidechains or blockchain layers may be built around it. For example, Bitcoin is a settlement layer and the Lightning Network is a sidechain used to take some of the pressure off of Bitcoin.

Lightning Network functions by processing multiple transactions “off-chain,” and compiling them into one single tranasction to be entered into the Bitcoin settlement layer. This reduces traffic and decongests Bitcoin, making it faster and more scalable.

This is comparable to making a transaction using Mastercard or Visa. When you purchase something with a Visa card, the transaction is not immediately settled in your bank account, but first processed by Visa and then settled in your bank account much later.