At the bottom of the Bluetooth LE stack is the physical layer (PHY). PHY refers to the physical layer radio specifications that govern the operation of the Bluetooth LE radio. This layer defines different modulation and coding schemes adopted by Bluetooth LE radio transmitters that affect things like the throughput of the radio. This in turn changes the battery consumption of the device or the range of the connection.
1M PHY, or 1 Megabit PHY, is the classic PHY supported by all Bluetooth LE devices. As its name implies, 1M PHY uses 1 megabit per second.
When initiating a connection between two Bluetooth LE devices, this is the mode that will be used, to begin with. Then the peers can request another mode if both devices support it.
2 Megabit PHY is a new mode introduced in Bluetooth v5.0. As the name implies, it effectively doubles the data rate to 2 megabit per second, or 2 Mbps. Since the data is transmitted at a higher data rate (faster), the radio needs to stay on for less time, decreasing battery usage. The downside is the decrease in receiver sensitivity which translates to less communication range.
While 2M PHY exists for users willing to sacrifice range for increased data rate, coded PHY was introduced to serve applications where users can achieve longer communication range by sacrificing data rate. Coded PHY uses coding schemes to correct packet errors more effectively, which also means that a single bit is represented by more than 1 symbol. Coded PHY uses 2 modes, S=2 and S=8. In the S=2 mode, 2 symbols represent 1 bit, therefore the data rate is 500 kbps. While in the S=8 mode, 8 symbols are used to represent a bit and the data rate becomes 125 kbps.