Fiat Currency Explained

[Stephen]

Many of us don't understand what is fiat currencies or even how it works.
I have prepared something for you to help you understand them easily.

Feel free to discuss this topic and post any question you may have.

What is Fiat Currency?
In a fiat currency system, the currency is not backed by a physical commodity. Which means the lacking intrinsic value that is declared legal tender by a government.




How does Fiat Money work?
Currencies that governments declare to be legal tender. Legal tender in this context means that the money has the full backing of the government that issues it.

Fiat money is not backed by any commodity, such as gold or silver, but only by the faith of the bearer. Which mean, fiat currencies don’t have any intrinsic value (e.g., paper money and much coinage). The USD, GBP & EUR are examples of fiat currencies.




Why does Fiat Money matter?
Fiat money allows the declaring government to employ virtually any material, such as paper (which is lightweight, convenient for carrying and easy to print) or coins (extremely low-value metals), as a medium of exchange. However, since the value of fiat money lies solely in the faith of those using it, its value can be easily diminished. More broadly, our entire monetary system is based on trust.