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Fiat currency is a type of money that is not backed by a physical commodity, such as gold or silver. Instead, its value is derived from the government that issues it and the public's trust in that government. The term "fiat" comes from the Latin word for "let it be done," reflecting the fact that the currency is established by government decree.

Most modern currencies, including the US dollar, the Euro, and the Japanese Yen, are fiat currencies. Their value fluctuates based on factors like supply and demand, inflation rates, and the economic stability of the issuing country. Unlike commodity money, which has intrinsic value, the value of fiat currency is purely representative. This means that a fiat banknote or coin is worth only what the government declares it to be worth and what people are willing to exchange it for.

The advantage of fiat currency is its flexibility. Governments can manage the money supply to influence economic activity, such as controlling inflation or stimulating growth. However, this flexibility also carries risks. If a government prints too much money, it can lead to hyperinflation, devaluing the currency significantly. The stability and perceived value of a fiat currency are therefore heavily dependent on the responsible management by its issuing authority and the overall confidence of the public and international markets.