According to Wikipedia, a chibi is a style of drawing a character in a highly stylized way, with stubby bodies that are about the same size as the head. It originated from a Japanese word that means 'small' or 'child' and it  is usually done for comedic purposes.

What's a Chibi for?
Their heads along with their eyes are often exaggeratedly enlarged. Through a chibi, A character's emotions are clearer. So, I guess it's safe to say that a chibi, aside from being cute, also has a purpose--to express emotions.

Where Do Chibi Usually Appear?
Most chibi appear in actual anime series'. However, there are a few chibis drawn specifically for the purpose of being on game cards, stickers, merchandise, and other collectibles.

How Do the Japanese Use the Word?
In Japan, the word chibi is commonly used to describe short people. It's meaning is equal to to dwarf or runt. Ouch.

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