A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver. The value of the fiat currency is largely based on the public's faith in the currency's issuer, which is normally a country's government or central bank.

It is the paper money and coins we mostly use today (like Euros, Dollars, Pounds etc.). The key thing about fiat currency is that it's not valuable because of what it's made of. A euro coin isn't worth its weight in metal, and a euro banknote is just a piece of paper.

Instead, fiat currency has value because:

The government says it does: The government declares it "legal tender," meaning coins or notes that must be accepted if offered in payment of a debt.
Society agree it has value: Because everyone else in society accepts it for products and services, you also accept it. It's based on trust and the collective belief that it will be accepted by others.

Think of it like this: it's a social agreement. We all agree that these pieces of paper and metal represent value, so they do.

Fiat Currency - NOT "True" Money

To understand this argument, we need to look at what economists traditionally consider the main characteristics of actual money:

Durable: It should last a long time without decaying (like, say, gold but unlike, say, paper).
Portable: It should be easy to carry around (like metal pieces but unlike, say, oil).
Divisible: It should be easy to break into smaller units to make change (unlike, say, a painting).
Uniform: Each unit should be the same as another unit of the same value (all €1 coins should be the same).
Fungible: It should be replaceable by another identical item; mutually interchangeable.
Acceptable: Everyone should be willing to take it in exchange for goods and services.
Limited Supply (Scarce): There shouldn't be too much of it, or it will lose its value (like precious metals or precious stones).

Fiat currencies falls short and therefore is not actual Money …

Governments can print more: Unlike a commodity like gold, where the supply is naturally limited, governments and central banks can create more fiat currency electronically or by printing more paper.
Risk of Inflation: If a government prints too much money, the value of each unit can decrease. This is called inflation - your money buys less than it used to. This ability to increase the supply at will makes fiat currency inherently unstable in the long run.
Governments can decide on a change of the currency: Older notes and coins may no longer be accepted as legal tender and no longer be exchangeable to the newer currency. (do not leave your fortune stacked in your mattress …)
No Intrinsic Value: Because it's not tied to a physical commodity with inherent value (like gold or silver used to be in some monetary systems), it's value is purely based on faith. If that faith erodes (due to economic instability or government mismanagement), the currency can become worthless (hyperinflation).

In summary:

Fiat currency is a government-issued money we use daily, and its value comes from government decree and our collective agreement. It is not "true" money because it's supply is not naturally limited, and it's value is not tied to anything tangible, making it potentially susceptible to inflation and loss of faith. In contrast with commodity money (like gold or silver), which has intrinsic value and a limited supply, or the dollar when it was tied to gold via the Gold Standard. (A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.)

https://www.dbm.academy/faq for more blockchain vocabulary.

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