How Crypto Is Really Classified (Without the Buzzword Nonsense)

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In crypto, everyone throws around labels: L1, L2, DeFi, RWA, meme coins, stablecoins…

But most people can’t clearly explain what any of those actually mean.

This post is a practical map of the crypto landscape — how assets are commonly categorized, why those categories matter for investors, and where the lines are blurrier than Twitter makes it sound.

Use this as a mental framework whenever you research a new coin or token.

1. The First Split: Coins vs. Tokens

Before talking about “Layer 2” or “DeFi blue chips,” you need the most basic distinction:

1.1 Coins (Native Assets)

A coin is the native asset of its own blockchain.

  • It runs on its own network.

  • It usually pays for transaction fees.

  • It’s often used to secure the network (mining or staking).

  • Examples: BTC (Bitcoin), ETH (Ethereum), SOL (Solana), AVAX (Avalanche)

If it has its own chain and is the main currency of that chain, it’s a coin.

1.2 Tokens

A token is issued on top of an existing blockchain.

  • It doesn’t have its own chain.

  • It uses another network’s security and infrastructure.

  • Most DeFi, gaming, governance, meme, and RWA assets are tokens.

  • Examples (on Ethereum): UNI, LINK, AAVE, PEPE, most stablecoins

Every crypto asset you look at should pass this first test in your head:

“Is this a native coin with its own chain, or just a token riding on someone else’s chain?”

2. Infrastructure: Layer 1 vs. Layer 2

The next classification is all about where computation and security happen.

2.1 Layer 1 (L1) Blockchains

Layer 1s are the base networks. Everything else sits on top of them.

  • Examples: Bitcoin, Ethereum, Solana, Avalanche, BNB Chain, Cardano

  • They provide:

    • Consensus (how the network agrees on the state)

    • Security

    • A base asset (BTC, ETH, SOL, etc.)

When people talk about an “L1 rotation,” they mean capital flowing between these base chains.

2.2 Layer 2 (L2) Networks

Layer 2s are built on top of a Layer 1 (usually Ethereum) to improve scalability and cost.

  • Popular examples:

    • Arbitrum, Optimism, Base, zkSync, Starknet, Scroll

  • Basic idea:

    • Process many transactions off-chain or in batches

    • Post compressed data or proofs back to the L1

    • Rely on the L1 for final settlement and security

So:

  • Ethereum → L1

  • Arbitrum / Optimism / Base → L2s that settle back to Ethereum

When you hear “L2 airdrop,” “L2 ecosystem,” or “L2 rotation,” this is what they’re talking about.

3. Stablecoins: Not All “Stable” Is the Same

Stablecoins are designed to track a target value, usually 1 USD.
But the way they do that is crucial.

3.1 Fiat-Backed Stablecoins

Backed (in theory) by cash and short-term bonds held by a centralized issuer.

  • Examples: USDT, USDC, (formerly) BUSD

  • Pros:

    • Generally more price-stable

    • Widely accepted across exchanges and DeFi

  • Cons:

    • Centralized — blacklisting and censorship are possible

    • Regulatory risk and reliance on banks

3.2 Crypto-Collateralized Stablecoins

Backed by on-chain collateral (like ETH or wBTC), managed by smart contracts.

  • Classic example: DAI (MakerDAO)

  • Design:

    • Over-collateralized vaults (e.g., $150 in ETH backing $100 in DAI)

    • Governance tokens manage risk parameters

  • Pros:

    • More transparent and “on-chain native”

  • Cons:

    • Can de-peg in extreme market stress

    • Still exposed to underlying asset volatility

3.3 Algorithmic / Hybrid Stablecoins

Peg is maintained by incentives, algorithms, and sometimes partial collateral.

  • Historically the most dangerous category

  • Famous cautionary tale: UST (Terra) collapse

Whenever you see a new stablecoin, ask three questions:

  1. What actually backs it?

  2. Who controls it?

  3. How exactly is the peg maintained — collateral, code, or “vibes”?

4. DeFi Tokens: Financial Protocols on Chain

DeFi (“Decentralized Finance”) isn’t a layer, it’s an ecosystem of protocols built on top of L1s and L2s.

4.1 DEX & AMM Tokens

Decentralized exchanges (DEX) and automated market makers (AMM):

  • Examples: UNI (Uniswap), SUSHI (SushiSwap), GMX, dYdX

  • Tokens are typically used for:

    • Governance (how fees, incentives, and upgrades are decided)

    • Sometimes fee sharing or revenue split

    • Emissions to bootstrap liquidity and volume

If the token is tied to swapping, providing liquidity, or trading pairs, it likely sits in this category.

4.2 Lending & Borrowing Protocol Tokens

On-chain money markets:

  • Examples: AAVE (Aave), COMP (Compound)

  • Protocols allow:

    • Depositing assets to earn interest

    • Borrowing against collateral

  • Token roles:

    • Governance over risk parameters, collateral types, interest models

    • Sometimes fee distribution or staking rewards

4.3 Derivatives & Perpetuals

Derivatives platforms offering perpetual swaps, futures, options, structured products.

  • Examples: GMX, dYdX, PERP

  • Token functions:

    • Risk and parameter governance

    • Revenue sharing / fee discounts

    • Liquidity incentives

When people say “DeFi blue chips,” they’re usually talking about large, battle-tested protocols in these categories with real usage and significant TVL (Total Value Locked).

5. Utility, Governance, and Meme Tokens

Not all tokens are defined by “sector” alone. Some are classified by how they’re supposed to be used.

5.1 Utility Tokens

Tokens intended to be used within a specific ecosystem:

  • Paying for fees in a game or app

  • Unlocking features, discounts, or premium tiers

  • Being required for staking or participation

In reality, many “utility” tokens are used primarily for speculation, not actual utility — and the market often punishes that gap.

5.2 Governance Tokens

Tokens that give holders voting power over a protocol or DAO.

  • Examples: UNI, AAVE, COMP, MKR

  • Typical governance decisions:

    • Which assets to list

    • How to adjust fees and interest rates

    • How to spend or allocate the treasury

In practice, most major DeFi tokens are both: they have some utility and also serve as governance tokens.

5.3 Meme Coins

Meme coins are driven by culture, narrative, and community energy, not cash flows or fundamentals.

  • Examples: DOGE, SHIB, PEPE, FLOKI, and endless others

  • Main drivers:

    • Memes, social media, narratives

    • Communities forming an identity around the token

    • Occasionally influencers or large buyers

Sometimes memes evolve into something more (ecosystems, NFTs, games), but at their core:

A meme coin is a speculation on attention more than anything else.

6. NFTs and NFT-Adjacent Tokens

NFTs (Non-Fungible Tokens) are unique, non-interchangeable assets on-chain.

  • Used for:

    • Art and collectibles

    • In-game items and skins

    • Tickets, membership passes, identity

  • Examples: CryptoPunks, Bored Ape Yacht Club, Azuki, etc.

Around NFTs, you get another set of tokens:

  • Marketplace tokens: e.g. BLUR, LOOKS

  • Gaming/metaverse tokens: native tokens of NFT-heavy games or virtual worlds

Many investors treat NFTs as a separate asset class inside crypto, because the dynamics (rarity, culture, community) are often very different from fungible tokens.

7. Real-World Assets (RWA) and Asset-Backed Tokens

RWA tokens are about bringing off-chain value on-chain.

Examples include:

  • Tokenized government bonds or money market funds

  • Tokenized real estate cash flows

  • Tokenized gold and other commodities (e.g. gold-backed tokens)

Narrative:

“Use blockchains to represent traditional assets, settle them faster, and make them programmable.”

When you see “on-chain treasuries” or “tokenized T-bills”, that’s the RWA category.

8. Sector Tags You’ll See on Data Sites

Market data sites (CoinGecko, CoinMarketCap, etc.) group assets into narrative-based sectors to help you screen and rotate.

Typical sector tags:

  • Smart Contract Platforms (Ethereum, Solana, Avalanche, etc.)

  • DeFi (DEX, lending, derivatives, yield aggregators)

  • Stablecoins

  • NFT & Gaming / Metaverse

  • RWA (Real-World Assets)

  • Privacy (Monero, Zcash)

  • Oracles (Chainlink, Band)

  • Interoperability & Infrastructure (bridges, indexing, data)

  • Meme

These tags are not perfect. A single token can belong to several categories at once.
But they’re extremely useful for seeing where liquidity is rotating and which narratives are heating up or cooling off.

9. How to Actually Use These Categories as an Investor

You’re not trying to memorize textbook definitions. You’re trying to make faster, clearer judgments about what you’re buying.

Whenever you look at a new asset, ask:

  1. What layer is this?

    • L1, L2, or just an app running on top?

  2. What function does it serve?

    • Money (BTC)?

    • Smart contract platform (ETH, SOL)?

    • DeFi protocol (AAVE, UNI, GMX)?

    • Meme/community token (DOGE, PEPE)?

    • RWA, stablecoin, NFT-related?

  3. How does the token capture value?

    • Does it receive protocol fees?

    • Does it have real governance power?

    • Or is it basically a pure meme with no claim on anything?

  4. What are the main risks?

    • Smart contract risk

    • Centralization/regulatory risk (especially for stablecoins and RWAs)

    • Extreme volatility and illiquidity (memes, microcaps)

    • Peg risk (stablecoins)

The more coins you classify through this lens, the less the market will feel like chaos and the more it will start to look like a map you can navigate.

You don’t have to be right about every narrative.
But you do want to know what you’re actually holding — and which bucket of risk it belongs to.


This article reflects only personal opinions and general information, and does not constitute investment advice or a recommendation to buy or sell any asset.

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