IOUs are widely used between individuals and businesses worldwide. Get to know the IOU definition in the crypto context and beyond by checking out the explanation below!
What Is IOU?
The term “IOU” derives from the phrase “I owe you”, and is used to describe a semi-formal document or a verbal agreement that acknowledges a debt between two parties. IOUs are typically associated with monetary debts, yet they can also entail other forms of assets, such as physical goods or properties.
What You Need To Know About IOU
IOUs serve primarily as a reminder and do not have a legally binding contractual value. This means that they typically don’t feature any information regarding the consequences of not paying or the specific dates that the sum should be returned to the lender.
Yet, the contents of an IOU ultimately depend on the parties involved, with some including the names and addresses of the parties, while others only stating the amount of debt owed.
With the advent of cryptocurrencies, a new IOU type has emerged in the form of tokens. These blockchain-based IOUs allow traders to easily create and trade debt representations between different networks.
An IOU crypto token performs a similar function to a traditional IOU document, denoting a debt relationship between two parties. For example, if you lend Bitcoin to a friend, they can create an IOU token which will be stored in your personal wallet as proof of the transaction. When you return the IOU token, you are requesting payment for the Bitcoin you lent.
The versatility of blockchain technology, especially with the implementation of smart contracts on some protocols, makes it particularly simple for users to create and transfer IOU tokens.
What’s more, given the popularity of ERC-20 and BEP-20 tokens, minting IOU tokens is a convenient means of keeping track of debt in the cryptocurrency world. However, keep in mind that, just like their traditional counterparts, crypto IOUs do not have binding power.
