Definition:
Fiat is defined as currency that is declared by a country’s government to be legal tender. Examples of fiat include the US dollar, Euro, Yen, Pound Sterling, etc. Unlike other historical currencies, which were backed by the value of a physical commodity, such as gold, or silver, the value of fiat is derived from its demand and supply as well the stability of the issuing government.
Explanation:
The word ‘fiat’ is derived from Latin and can be translated as “it shall be done” or “let it be done.” The majority of paper currencies, such as the ones used to purchase everyday goods and services, are fiat currencies.
Historically, currencies were minted from valuable commodities, such as gold or silver materials. Soon after, paper money which could be redeemed for a particular amount of physical commodity was introduced. The fiat currency, as we know it, is unredeemable. Since it is not linked to any physical resource, it is prone to losing value due to overprinting (hyperinflation). Fiat is also highly centralized since it is fully controlled by a single government or central bank.
Bitcoin, the first decentralized digital currency, was developed to address the many shortcomings of fiat currencies.
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