Skin color patterns are ubiquitous in nature, impact social behavior, predator avoidance, and protection from ultraviolet irradiation. A leading model system for vertebrate skin patterning is the zebrafish; its alternating blue stripes and yellow interstripes depend on light-reflecting cells called iridophores. It was suggested that the zebrafish's color pattern arises from a single type of iridophore migrating differentially to stripes and interstripes. However, here we find that iridophores do not migrate between stripes and interstripes but instead differentiate and proliferate in-place, based on their micro-environment. RNA-sequencing analysis further reveals that stripe and interstripe iridophores have different transcriptomic states, while cryogenic-scanning-electron-microscopy and micro-X-ray diffraction identify different crystal-arrays architectures, indicating that stripe and interstripe iridophores are different cell types. Based on these results, we present an alternative model of skin patterning in zebrafish in which distinct iridophore crystallotypes containing specialized, physiologically responsive, organelles arise in stripe and interstripe by in-situ differentiation.