Two hours is not a lot of time for a bike ride.

Best Route (which is basically what you outlined above) - Starting at Niagara-on-the Lake as you indicated head along the Waterfront Trail (it follows Lakeshore Road at this point) for about 12 km. Left turn and head up the Welland Canal Trail. If possible get to Port Robinson where there is a free bike ferry across the canal and then continue to Chippewa. Join the Niagara Recreation bike Trail which goes back to Niagara-on-the Lake. However this is about 80 km and will take a good part of the day.

Most scenic route - If only have 2 hours cycle along the paved Niagara Recreation Trail between Niagara Falls & Niagara-on-the Lake. Inniskillin & Reif (has bike rack) wineries are right along this route. Sights include the falls themselves, several historic homes, gardens, Brock Monument (historic from war of 1812), town of Queenston, Fort George in Niagara-on-the Lake, floral clock along with the great views along Niagara River.

Faster route - from Niagara Falls or Chippawa head along the Niagara Recreation Trail towards Fort Eire and this is quicker as there are less cyclists. However you cannot complete this in 2 hours either so it is a case of cycle for one hour and return. The views look different in each direction so don't worry about the repeat.

Note: I am not from the area but live in Toronto so cycle in the Niagara area frequently.

Tom