Fiat money is currency that isn't backed by a physical asset like gold yet has been declared legal tender by a country's government.
Fiat money's value is based on supply and demand instead of the value of the metal or material that the money is made from.
The term takes its name from the Latin word 'fiat' which means 'let it be done' or 'let it become' and it’s linked to 'Royal fiat', a term that describes a monarch's right to make an order or decree and expect that it will be done.
The same principle applies to fiat money. For example, the government of the United States decrees that one dollar can be exchanged for a set amount of goods or services.
The dollar can no longer be traded for gold since the currency is no longer linked to the Gold Standard.