What does FIAT mean?

Fiat money is the currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of each country’s fiat currency is determined by the supply of the currency and the demand for it to purchase goods and services.

Fiat currencies are backed by nothing more than the credit of the economy and taxing authority of the government that issues it, as well as the faith of those who choose to use it. This poses a risk of hyperinflation, because when faith in the currency is lost it no longer holds any value.

Nearly all modern currencies are fiat currencies, having no real intrinsic value, and used entirely as a means of payment. As long as the fiat currency continues to serve as a medium of exchange, holds it value, and provides accounting it serves a useful purpose. With the rise of cryptocurrencies discussions of fiat currencies have become more prominent, as cryptocurrencies can take on all three of these roles, raising the question of the necessity of fiat currencies, which are centralized and controlled by central banks and governments.