The word 'fiat' as related to currency, is often unhelpful and confusing. It should, in my opinion, only be used to refer to the aspect of some currency which is that it (sometimes) has government backing (ie that currency is declared to be legal tender for all debts by 'government fiat').

The whole money-as-IOU vs money-like-gold distinction is another thing again.

So, I think original reply has a very good point. There are two types of currency being talked about and bitcoin is very much in the money-like-gold camp whereas this proposal is very much a money-as-iou concept. Personally I think this idea of combining the two is really exciting and something I've been working on - like modern banking is to gold, I think money-as-iou built on top of bitcoin is a very exciting prospect.

In my way of looking at things there is fiat money then there is debt based and market based money, or as I like to call them 'two sided' and 'one sided' currency.

Bitcoin is a 'one sided' currency like gold (or tulips during the tulip mania) in that there is only one person involved in creating its value. Originally it's mined, but it's valuable because there are people who will buy it today because they estimate there will be people who want to buy it tomorrow. That is, there is market today, because there is an estimate of a market for it tomorrow (and a guarantee of limited supply). People buy bitcoins (or gold or tulips) today either because they are speculating on it's future value or because they find it useful to convert there thing of value (let's say it's tee shirts they are selling online) temporarily into gold or bitcoins because the instrument in question is more easily transferred, combined and stored than the thing they have of value (tee shirts). However, their intention in either case was to sell it back into the market later on. As the Austrian economists would say there is a market value for cash in your wallet because its easier to carry around this cash and turn it into bread at the corner store than try to convince the shop owner to accept an hour of your labor (or part ownership in your house). The point being that nothing intrinsically 'backs' the currency other than the ongoing existence of a market place [1] and corresponding estimate of that ongoing existence.

'Two sided' money or debt based currency systems require at least two people to create them, They are 'valuable' regardless of the market mood in future, because at some point a promise was made to redeem that instrument for something ostensibly of value in future. To the extent that the person (or person(s)) making that promise continue to be 'in good standing' the instrument in question continues to have value. They also have value, like one sided systems, because of simple market place estimates. Two sided or debt based currency systems include mutual credit systems (such as LETs or 'commercial barter'), the original ripple system, and also, in a much more complicated way, most of the value in our modern commercial money system. You can distinguish a debt based system different from 'one sided' system in that, nominally at least, the instrument of credit is destroyed once it returns back to the person who created it, so the amount of currency in circulation can expand or contract depending on the amount of promises made.

With modern money (what people sometimes, unhelpfully call 'fiat' money [2]) our commercial banks create more money by expanding their balance sheet. When they do this, a new deposit is created at the same time as a corresponding promise in the form of a loan the bank makes to a person (who promises to pay back the loan by doing things for the instrument in question, aka 'money' and then returning that money to the bank). When the person or company eventually pays back that loan (or they default) the corresponding deposits on the other side of the balance sheet are also extinguished. In this way the money supply can both expand or contract. (Unlike gold or bitcoin).

In practice, of course, it only ever expands. Two sided aka modern money is more flexible than one side money (aka money-like-gold, aka bitcoin) in that the supply, or more usually, the rate of creation of supply can be controlled by adjusting the interest rates on loans (and hence the willingness of people to take up new loans and thus expand the money supply). On the other hand some claim it is more open to corruption (or just short term thinking) leading to oversupply and hence inflation (or loss of value) in the longer term.

All of which is to say the grandparent post really has a very good point. This proposal is about money-as-IOU which is really quite the opposite of the bitcoin money-like-gold concept. That said, the combination of the two is very exciting in my opinion (which is why I've been working on http://thankful.as and have been excited about ripple since as an idea since I first heard about it)

Phew.

[1]
Of course Gold (unlike bitcoin) does have a small 'intrinsic' value as adornment or in industrial processes, but IMHO this is largely irrelevant as to what is the reason for its value as a currency, and why I believe bitcoin has as much staying power as gold. (ie lots).

[2]
Gold has also, on occasion, been stamped with the picture of the king, signifying that it is acceptable within that kingdom in payment of taxes. This 'stamping' is functionally very similar to the 'fiat' laws we have in place today regarding the value of cash.

Interestinyly whenever gold was stamped, the gold traded for a higher value the metal value of raw gold of the same weight, though only within the kingdom in question, not internationally. Of course, from the King's perspective the neat thing about this was that the king could redeem value today by buying (or just taking) raw gold and then stamping it with their picture. Essentially they receiving value today from the future value of taxes that would be paid in that coin. This may be one reason why monarchs would so often call in all the gold in their kingdom, stamp it, and then send it back out again.

Incidentally, by continuing the analogy of gold and bitcoin, the government could also, today, retrieve value from their future taxes by stamping certain parts of the bitcoin chain with a cryptographic stamp indicating that they would be willing to accept those particular bitcoins as legal tender for taxes in future.. thus allowing them to buy bitcoins at price x, stamp them and then sell them for price y, higher than x. (Where market economics would suggest that the carrying capacity of (y-x)*n for the n bitcoins they do this to would be about equal to the future value of all taxes that people want to pay in bitcoins.)