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fiat money explained

Fiat money is a currency that is backed by a government or central authority but not backed by a valuable commodity such as gold or silver.

If you’re wondering if fiat money has anything to do with the famous Italian car manufacturer Fiat, the answer is no, although you would certainly use fiat money to buy one.

The term fiat money derives from the latin word ‘fiat’ which literally means, “let it be done” and when pronounced by a figure of authority could be interpreted nowadays as “consider it done” or “done deal”.

As a society, we have always needed some form of exchange of value, whether that be bartering where we exchanged one thing for another, for example, bread for vegetables or a commodity-based value of exchange like in a prison where cigarettes have been commonly used as a form of currency as once gold, silver, tobacco and other valuables were. 

We eventually switched away from using commodities to using a form of paper money or coins that have no intrinsic value but were instead backed by physical gold sitting in a vault, the gold standard. 

This gave people the required confidence to use this money as a means of payment and provided a far simpler, more portable means of storing and transferring value. 

The gold standard eventually came to an end in 1971 and led to our current fiat money system. 

The fiat money system is backed entirely by the government and this is sufficient for people to gladly accept it as payment without worrying that it will lose value or fail to be accepted.


What is fiat money?

Imagine you walked into a store, took out a blank piece of paper and wrote an IOU promising to pay for the goods at a later date. 

It’s very unlikely you will get very far unless you know the owner of the store very well and he or she trusts you. 

On the other hand, if you handed over a €50 note as a stranger, the €50 note is still a piece of paper, and you’ll no doubt walk out with the goods minutes later. 

So why is the second piece of paper acceptable whereas the first isn’t?

It comes down to one word, confidence.

The store owner or clerk will happily accept the €50 note as they have absolute faith that the €50 note represents 50 euros of value. 

There is no doubt at all. The reason for this absolute confidence is because the government has issued this note as legal tender and promises to honour the value of the €50 note.

It’s literally based on confidence in the government. 

Now, let’s imagine, we are in a war situation and the government is collapsing. 

The €50 note could actually become totally worthless very very fast. 

This example demonstrates the importance of confidence in the issuing entity, in this case, the government. 

Without this confidence, you are left with worthless sheets of paper and bits of metal.

Thankfully this is not a situation that we are in and we have faith in our government systems when it comes to our money at least. 

So, this is effectively what fiat money is, “let it be done” or if I receive this €50 note it represents a value of no more or no less than €50. 

The store owner or clerk accepts this piece of paper due to absolute confidence in what it represents as it’s backed by our government.

Nowadays we are moving further away from fiat notes and coins to entries in a bank account, we do not even see the actual money although we could. 

When we swipe or touch our card to make a purchase, our money in digital form is removed from our account and sent to the other person’s account, neither party will generally see the actual notes and coins. 

It’s not inconceivable to imagine a society where notes and coins are no longer used. We can already see glimpses of these in urban transport systems where cashless payment systems like the Oyster card in London are used and it’s actually no longer possible to pay a bus driver with cash money.


Fiat vs crypto?

As we have determined, the only reason fiat money is widely accepted and trusted is because it is issued and backed by the government as legal tender. 

We have absolute faith in its value. So how would crypto differ from fiat money?

Where fiat money is underpinned, supported, and backed by our government, crypto is instead underpinned by something known as a blockchain. 

There is no intrinsic value or any government supporting it, far from it in fact.

A blockchain is effectively very sophisticated software running on a decentralised network of computers that records transactions in a chain made up of something called blocks, hence the name. 

As this article is about fiat money we won’t go into the details of how crypto works and what blockchains are but in its simplest form, a blockchain is a digital ledger that has been designed to be decentralised, i.e. there is no central body in control and has been designed to make the blockchain virtually unhackable or tamper-able. 

These are virtues every financial system should have at its core.

So where the government and their respective central banks issue, guarantee and support our money, crypto is entirely decentralised and highly accountable as every single transaction is recorded on the blockchain and is there for anyone to see. No government or bank affords anywhere near this level of transparency.


The advantages of crypto when compared to fiat money

  • The fact that crypto is decentralised is a big deal, there is no central entity with an agenda or undue influence.
  • Blockchain technology is pretty robust and the risk of a complete failure is quite minimal.
  • Cryptocurrencies are unlikely to suffer from hyperinflation as unlike our fiat money there is usually a maximum amount of a cryptocurrency that will or can ever be produced. If we use bitcoin as an example, there will only ever be 21 million bitcoin produced. It’s not possible to create more. This creates a level of scarcity that can help to sustain the value. Fiat money on the other hand can be endlessly issued and this can lead to the currency losing some of its buying power, otherwise known as inflation.
  • Lastly, cryptocurrency transactions are relatively immediate, you don’t need to wait for days to get your money.

Crypto does make a pretty strong case, but for now, fiat money is still king!

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crypto coin burn

Crypto coin burn is when crypto coins or tokens are permanently and intentionally removed from circulation in order to help elevate the price by decreasing supply.


The crypto market is driven largely by supply and demand economics

Unlike say the money supply which is backed by the government or a commodity such as oil or gold which has an inherent value, there is no such inherent value in crypto. 

If Bitcoin were to collapse, there is no liquidation process where assets can be sold off in order to compensate shareholders and suppliers. 

As demand and supply are the primary levers behind the price, more coins or tokens can be added to the supply which can bring prices down, or coins or tokens are permanently destroyed “burned” in order to drive the price up. 

What is a crypto coin burn?

A crypto coin burn is the intentional permanent destruction of a crypto coin or token by the development team behind the crypto. 

The coin burn removes the desired amount of crypto tokens or coins from circulation. 

It is as permanent as taking a big wad of Euro notes, wildly spraying them with gasoline and setting them on fire. 

Once those notes are burnt, they are totally unusable and out of circulation. 

Well, the same happens with a coin burn, without the gasoline and fire of course!

What is the purpose of a crypto coin burn?

There are a couple of primary reasons why coin burns take place. 

One of them is to help maintain/stabilise the price of a stablecoin. 

Stablecoins are generally pegged to a fiat currency like the US Dollar or to a valuable commodity such as gold or they maintain their price using an algorithm. 

If the price of the coin or token were to fall beyond a certain level a coin burn would take place which would lead to the price going up to the desired price point, for example, to match the price of the US Dollar due to the decreased supply. 

Naturally, the reverse happens should the price be too high, more coins or tokens would be added to the supply. 

A further reason for coin burns is to help push the price upwards by removing coins or tokens from the available circulation. 

The decrease in supply makes each coin more valuable and therefore more attractive to investors. 

Corporations employ a similar technique known as a share buyback, where they are reducing the supply of available shares in the market in order to drive the share price up. 

The key difference is that the shares are not being destroyed, but rather reabsorbed by the corporation. 

The end goal is very much the same though. 

To reduce the supply in the open market and drive the share price up. 

Another example of a similar dynamic is the supply of oil into the market. If the price of a barrel of crude oil drops below a certain level, the oil-producing nations will often restrict supply in order to drive the price back up in order to maximise their profits.

How does crypto coin burn work?

A crypto coin burn is a totally transparent process and anyone can verify the coin burn on the blockchain. 

As dramatic as it may sound, there is no fire or actual burning involved, it’s all happening in the digital realm. 

A crypto coin burn occurs when a predetermined amount of coins or tokens are sent to a special address also known as an “eater address”. 

Nobody has an access key to this address, not even the developers and once the coins or tokens have been transferred there, there’s literally no way of getting them back. 

Think of it like a safety deposit box where you can push valuables in, but you have no way of opening the box to take anything out. 

The valuables remain there. Now, in the case of the safety deposit box, it’s still somehow possible, for example by opening the box by force, no such possibility exists in the crypto world. 

The coins or tokens are technically still accounted for but not available for use. 

It’s worth remembering that coin burn is intentional, it is different to situations where coins or tokens are accidentally sent to the wrong address or a person loses access to their wallet after they have lost their private key and those coins or tokens are no longer retrievable. 

The crypto world is brutally clear and very unforgiving when it comes to lost coins, burned or otherwise.

A couple of high profile coin burn examples

Ethereum, the second-largest crypto after bitcoin undertook a major coin burn event, burning through an eye-watering $144m ETH in 2021 following major network upgrades. 

ETH was being burned at a rate of 3.15 tokens or around $10,000 per minute. Another different coin burn event was by the founder of Ethereum as it happens, Vitalik Buterin. 

In this case, it was a Dogecoin, Shiba Inu. Vitalik burned a staggering 410 trillion SHIB, 90% of what was in his wallet, this drove the price up 40%, as the coins Vitalik burned represented about 40% of the total SHIB supply. 

In this case, his motives were different, but, the end result was as expected, the removal of a significant number of coins from circulation, made the remaining coins more valuable, well, for some time at least.


Demand and supply dynamics drive the crypto market, pure and simple. 

As non-stablecoin crypto typically does not have an inherent value and is not generally backed by anything or anyone, there are not many levers that can be intentionally pulled to somehow control the price. 

Coin burning is one useful lever available to all crypto coin developers and also communities. 

By reducing supply via a coin burn event the price can be artificially driven up thus making existing coin and token holders happier and making the coin or token more attractive to new investors.

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crypto coins vs tokens

It would be difficult not to have noticed just how much the world of crypto has exploded over the last few years, note here that I am using the word crypto and not specifically cryptocurrency. 

Crypto is nowadays no longer just about coins, but about tokens too. In this article we are going to get into crypto coins vs tokens and what this actually means.

Back in the day, a digital currency was the primary use case when the Bitcoin token arrived on the scene. Since then the crypto world has changed a lot! 

Where cryptocurrency was the main attraction, it’s now perhaps more of a supporting act without which the crypto scene wouldn’t be able to function. 


What are crypto coins?

Way back in 2009 when Bitcoin first arrived on the scene, we were looking at a revolutionary new form of digital currency built on an innovative technology called blockchain. 

The sole purpose of a cryptocurrency was to provide a decentralised means of digital value storage and transfer which was fit for the needs of the internet age, not controlled by any government or private organisation and not geographically limited. A digital currency for the entire world!


The basics of how blockchain technology works

A blockchain is a decentralised ledger running across a peer-to-peer network of computers. No single computer, organisation or person controls it. 

When done well, it’s near impossible to hack or manipulate and, if public, is totally transparent. 

A blockchain operates as a digital ledger validating and recording each transaction across the network according to strict protocols. 

Each blockchain has its own currency which effectively rewards the participant computers that make up the blockchain with coins such as Bitcoins or Ether in the case of Ethereum. 

Another key aspect of a blockchain is that the coins cannot be duplicated. 

All of these factors provided by blockchain technology have created a suitable environment in which digital crypto coins can be created and used as secure means of payment.


What are blockchain tokens?

Now that we have some understanding of what blockchain technology is, we can see that this non-centralised, robust, secure network of computers and strict protocols could be used to do a whole host of other things beyond simply being a currency and payment system. 

Well, some people realised this and the token was born!


What is a token? 

Tokens often get mistaken for digital coins but are in fact created on existing blockchains and are not a blockchain’s currency in their own right. 

The most popular blockchain platform for token developers is Ethereum due mainly to being a well-established blockchain and having a well-established cryptocurrency called Ether, which is the second most popular crypto coin after Bitcoin.

Tokens built on Ethereum follow several standards, but the most widely known and used is “ERC-20”. Those are “fungible” tokens. 

When built using the ERC-20 standard, tokens are known as ERC20-tokens. One such example is Uniswap’s UNI.

There are other blockchains that allow for the creation of tokens, such as Binance Smart Chain, Stratis, Waves, Lisk and NEO. 

NEO for example uses tokens known as NEP-5 tokens, Binance’s are BEP-20.

There are also “non-fungible tokens” (NFT) created atop blockchains. Those on Ethereum, for example, are known as ERC721.

In summary: a coin is a unit of value of and native to a blockchain network, and a token is a unit of value for something built atop a blockchain network.


Coins, tokens and blockchain simplified

A simplistic way to imagine how crypto coins, tokens and blockchains work together could be as follows: Imagine that blockchain is like the operating system running on your Android or iOS smartphone, something very powerful yet quite useless without any applications. An app like a video game – a piece of software running on the operating system – could be powered by a token. 

To play the game, you would pay for the use of your phone’s operating system with the OS’s native currency – the coin – and for in-game items using the game’s native currency, the token. 

The game can’t run on anything else than your phone, and the game’s currency can’t be used outside of the game, but any game can run on your phone and any game can create its own currency.

That’s how you have many decentralised exchanges on Ethereum (Uniswap, dY/dX, SushiSwap, …) each with their own tokens, but all requiring that you pay transaction fees in ETH for the privilege of using the underlying blockchain.


What are Stablecoins?

Stablecoins are called “coins” but are, in fact, an interesting application of the “token” use case.

Stablecoins are literally designed to be “stable” “coins”, and the name came in opposition to most crypto coins and tokens which experience very high volatility.

Stablecoins try to “peg” their price to that of something more stable and predictable. It can be a fiat currency like the US Dollar or EURO or a commodity such as gold or silver where the price does not fluctuate as wildly as is generally the case with crypto coins. 

Stablecoins on Ethereum usually follow the ERC-20 standard. 

Examples include USDC, Tether, Dai. But they are not all created equal, so let’s take a look at the types of stablecoins you can find.


A few types of stablecoins 

Fiat-backed stablecoins (USDC)

One of the ways stablecoins can manage price fluctuations is by tying the stablecoin to a fiat currency such as the US Dollar or the EURO. A currency like the US Dollar or EURO is way more stable when compared directly to crypto. 

Usually, the entity behind the stablecoin will have a reserve in place where it will secure or guarantee the value of each stablecoin on a par basis to a fiat currency. 

That way, if we take the example of the dollar,  1 coin can always be redeemed for 1 US Dollar. 

Just as in the old days of the gold standard, each coin is backed by real money sitting in a real bank somewhere. 

The price of the coin fluctuates as much as the currency does, in this case exactly as the US dollar fluctuates.

In this way, a digital stablecoin and a real-world asset such as the US dollar are neatly tied together.


Crypto-backed stablecoins (DAI)

DAI is a crypto-backed stablecoin on the Ethereum blockchain using the MakerDAO protocol. 

What sets DAI apart is that MakerDAO wants the DAI to be decentralised, i.e. there is no central authority that has control of the system. 

Instead, smart contracts running on Ethereum aim to maintain the “peg”. 

This effectively means that DAI does not hold collateral in a bank on a 1:1 basis like the fiat-backed stablecoin but rather holds decentralised Ethereum reserves in a smart contract that are not controlled by any single entity. 

Naturally Ethereum reserves can of course be converted to fiat money at any point thus still giving the stablecoin real value in the non-digital world.

Since Ethereum’s price can go up or down, DAI is “over-collateralized”; meaning that there the reserve of ETH is worth more, in dollar terms, than the value, in dollar terms, of all DAI in circulation. 

That way, if the price goes down, DAI can still be redeemed for 1 USD’s worth of ETH.


Algorithmic stablecoins (TERRA, CELO)

The algorithmic stablecoin takes a completely different approach and isn’t backed by “external” collateral waiting on the sidelines ready to step in if things go south. It uses its own native coins to make its tokens stable. 

Terra has a USD stablecoin (UST, and it actually has a lot of other stablecoins pegged to other stuff too) which is collateralized by LUNA, the native token of the Terra blockchain. 

The Terra protocol acts as a market maker for the stablecoin. If the stablecoin system runs out of assets, it restocks by inflating the native LUNA supply and it goes on the market to buy and sell the stablecoin to maintain the peg.

Some, like Terra and Celo, have done fairly well so far. 

Others, like FEI, haven’t fared too well. It’s admittedly harder to create that kind of market than to just hold the real asset which you will exchange on request against the “tokenized” proof.



In the ever-exciting and constantly changing world of crypto nothing ever stays still. 

What started out back in 2009 as a new and somewhat crazy idea of creating a digital currency that nobody owns or controls has morphed into something truly massive and continues to grow at an unprecedented rate. 

Crypto no longer just refers to a digital currency but to a plethora of digital assets in the form of coins and tokens. 

This constant innovation keeps the engine running and presents plenty of opportunities for investors. 

The blockchain technology that enables both coins and tokens really is something of an outstanding innovation to be marvelled at. 

From where we stand now, we are certainly nowhere near the end of the road but rather still very much at the beginning and opportunities abound. 

It will be exciting to see just where we go from here in the exciting and ever-changing world of crypto coins and tokens!

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