'letter-based' is a compound formed in Modern English from the noun 'letter' + the adjective-forming element from 'based' (from 'base').

'letter' originates from Latin, specifically the word 'littera' (via Old English 'lǣttr'), where 'littera' meant 'a letter, writing'; 'base' originates from Old French 'base', ultimately from Late Latin/Greek 'basis' meaning 'a step, pedestal' and came into English as 'base'. The compound developed in modern usage by combining these elements to mean 'based on letters'.

Initially the components referred separately to 'a written character' ('letter') and 'a foundation' ('base'); over time the compound came to mean 'having letters as the foundation or primary basis' with little shift in the core senses of the components.