Education | Article

What is Fiat Currency

By Dan Mulligan | MAY 02, 2022

What is Fiat Currency 2:47 Min Read

What is Fiat Currency

Money. You’ve got bills, you’ve got coins — it’s all money. Or is it? In most cases, money is actually just a piece of paper or coin that holds value because the government says so. Most currencies in the world — known as fiat currencies — are not backed by anything, but instead by a government’s authority.

A fiat currency is a money that a government has declared to be legal tender, but it is not backed by a physical commodity. So, the U.S. Dollar, Euro, and Pound Sterling are all fiat currencies. While there are no longer any pure commodity-backed currencies (with the exception of gold), there was a large period of time when many different governments issued their own currency.

The value of fiat currency is determined by how much we all agree it is worth. And that’s all it takes. Although this type of currency is not backed by a physical commodity, fiat money has value because a government has declared that it does. In other words, the belief that you can use tokens such as coins, bills, or electronic digits in your bank account as legal tender to exchange for goods and services makes those tokens valuable.

Advantages of fiat currency

  1. Store of value, providing a numerical account, and facilitating exchange
  2. The ability to manage economic variables such as credit supply, liquidity, interest rates, and money velocity

Disadvantages of fiat currency

  1. Central banks of the issuing government alone control the money supply
  2. Inflation
  3. No Intrinsic value

In order to dig into what makes cryptocurrencies and the underlying Blockchain technology so compelling and disruptive, we need to start with some history of fiat money. The term “fiat” refers to a government decree. Central banks control the supply and demand of fiat money through monetary policy decisions that guide actions such as quantitative easing or interest rate adjustments. Cryptocurrencies and digital assets rely on Proof of Work or Proof of Stake mechanisms that validate the network and maintain its resilience and decentralization. Another major difference between the two currency systems is how they are created. Bitcoin, like most cryptocurrencies, has a limited supply and must be mined while central banks can print any amount at any time.

Cryptocurrencies offer an alternative to government-issued fiat money and have a number of features that make them attractive to many users. Cryptocurrencies have no physical counterpart, are decentralized, borderless, and irreversible.

The biggest problem facing cryptocurrencies today is volatility. Many people simply don’t feel comfortable converting their fiat into cryptocurrency, even though they believe in the future growth of the technology. AscendEX Earn provides a way to avoid some of the pitfalls of investing in cryptocurrency without turning your back on the opportunity entirely. It’s the next step in enabling broader crypto adoption, and it could pave the way for other companies to do the same.

Fiat currency isn’t going anywhere anytime soon. For those of us who have grown up in the U.S., it’s hard to imagine what it could be like to have to rely on another country’s currency. There are pros and cons to both types of currency (centralized and decentralized), but one thing is certain: while fiat currency isn’t particularly exciting, it is a lot more interesting than coins made out of tin.

Author: Dan Mulligan

SaaS marketer, trader of internet coins, tech enthusiast, and home chef. Buildooor of Tidus Wallet and current Marketing Director at AscendEX. Dan enjoys crypto twitter, market volatility, anime, and paid ads. Key accomplishments: - 5th Grade Readers are Leaders Winner - 2-0 Amateur Boxing Record - Former Overwatch Grandmaster

Education: B.A & MBA - Marketing Communications

Crypto Class of: 2016/17

Fun Fact: Served Method man and Red man ice cream from 2004-2009



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