Types of Tokens: Layer 1 vs Layer 2, Utility, Governance, and Stablecoins
"Crypto" covers assets with very different economics. Grouping them obscures more than it reveals.
Layer 1
The native asset of a base blockchain: BTC, ETH, SOL.
Value driver: these are required to pay transaction fees and to secure the network through mining or staking. Demand for the chain's use translates into demand for its token.
Ethereum's ETH has the clearest story: it is required to pay for computation, and a portion of fees is burned, so heavy usage reduces supply.
Layer 2
Networks built on top of a base chain to raise throughput, settling back periodically and inheriting the base layer's security.
They exist because of the scaling constraint: requiring every node to process every transaction bounds capacity. Processing off-chain and settling batches relaxes it.
Utility tokens
Grant access to a service: computation, storage, bandwidth.
Value driver, in theory: demand for the service. In practice: frequently weak, because a token you must buy and immediately spend creates no reason to hold it, and the "velocity problem" means high usage need not imply a high price.
Scrutinise these. Many exist because issuing a token was a fundraising route rather than because the product needs one.
Governance tokens
Voting rights over a protocol: parameters, upgrades, treasury.
Value driver: control over a protocol generating real cash flow, which can be genuinely valuable. Where the protocol earns nothing, governance rights over it are worth correspondingly little.
For any token, ask what forces someone to hold it rather than merely to use and sell it. Fee payment and staking create holding demand; pure access utility often does not.
Stablecoins
Pegged to a fiat currency, usually the dollar, and the plumbing of crypto trading. Most pairs quote against them, and they are how value moves between venues without touching the banking system.
Three designs with different risk profiles:
Fiat-collateralised (USDC, USDT): backed by reserves. The risk is whether the reserves exist and are liquid, which is a question about the issuer rather than about crypto.
Crypto-collateralised (DAI): over-collateralised with crypto. Transparent on-chain, and exposed to the collateral crashing faster than positions can be liquidated.
Algorithmic: maintained by a mechanism rather than reserves. The category has a poor record, and the 2022 collapse of one major algorithmic stablecoin destroyed tens of billions in days.
Stablecoin risk is the most underpriced exposure in crypto trading. Balances held for operational convenience are credit exposure to the issuer, and a depeg affects every position quoted against it simultaneously.