Set 100 years after the original Independence War, Independence War 2: Edge of Chaos starts with the murder of 12-year-old Cal Johnston's father at the hands of the industrial heir Caleb Maas, in an area of space known as the Badlands Cluster.
The player takes the role of Cal and is guided through the controls and procedures of piloting a space ship by a digitized representation of Jefferson Clay, a Commonwealth Navy character who featured in Independence War. Clay guides Cal to his pirate grandmother's former base of operations in Hoffer's Wake, teaching him how to use the weapons aboard his ship along with other pieces of basic combat information. After these practice missions, Cal finds Caleb Maas, the man responsible for his father's death, and attempts to avenge his father. Failing said attempt, Cal ends up in prison, and the game fast forwards 15 years into the future, where an older Cal is attempting to escape the prison which for such a long time he has been incarcerated in.
Cal returns to his grandmother's base and follows in her footsteps by starting up his own piracy group. As Cal's group grows stronger, he learns of an oppressive and violent group named the Marauders, who frequently attack residents of the Badlands Cluster. Cal is assigned the task of fighting the Marauders and so is given access to more systems of space inside the cluster. Cal eventually manages to drive the Marauders from Hoffer's Wake, but his actions were not enough to weaken the Marauders by any substantial amount.
After learning that the Marauders maintain a base in an area of space known as the Dante system. once thought to be an inaccessible area of space due to lethal levels of radiation. Cal and his rebel fleet successfully mount an attack on the base, but not without heavy losses due to the intervention of the Maas corporation, who are revealed to have started the Marauders to keep the "peasants" of the Badlands in line.
Cal and the rebels withdraw due to the power of the Maas corporation and consider a plan to take the Santa Romera Jump Accelerator, a piece of complicated technology found outside of the Badlands which allows for travel of significantly larger length than that achievable by use of Lagrange points. Cal and the rebels succeed in taking the accelerator and transport themselves to the Fomalhaut system to continue fighting the Marauders and the Maas corporation, much in the same way that they did in the Badlands Cluster.
One of Cal's missions leads him to spy on cruisers in an area of space known as the Gargarin Cluster. These cruisers activate an alien artifact which spirals out of control, spawning vast numbers of alien ships which destroy any power source in the path, such as the ships. Cal and the rebels hold back the alien ships at the Fomalhaut Jump accelerator allowing refugees to escape to the Badlands, then fly through the accelerator and destroy it, cutting off the Badlands from the Alien incursion. Cal is thankful that he, the rebels and the refugees are safe, but worries about the rest of humanity elsewhere.