An IOU, acronym for “I owe you,” is a document stating that one party owes a debt to another party.
In simple terms, an IOU is any document that explicitly outlines and acknowledges that there is an amount of debt owed between two parties. IOUs are some of the most important documents in financial agreements because they outline the debt relationship between two entities, regardless if these are people or businesses. Despite this, IOUs are not considered legally binding. They serve more as a reminder and don’t really have a binding contractual value.
IOU notices can be issued for any type of debt. Usually, IOUs refer to monetary debt, but also other forms of assets like real estate and physical goods. In a broader sense, an IOU does not need to be a physical document. This can also be a simple verbal agreement between parties, outlining the amount of debt and timeframe and conditions for repaying it. IOUs are regarded as semi-formal documents, and their main purpose is to serve as a reminder that there is debt between two parties. The contents of an IOU depend on what the parties want to include. Sometimes IOUs detail the names and addresses of the parties involved, while other times, they only state the amount of debt.
With the rise of cryptocurrencies, a new form of IOU has arisen. Blockchain-based IOUs allow traders to create tokens that represent debt and trade between different blockchains easily. An IOU crypto token performs the same service as an IOU notice - it exists to denote a debt relationship between two parties. For example, if you lend Bitcoin to a friend of yours and you want proof of this transaction, your friend can create an IOU token, which will be stored in your personal wallet. When you send back the IOU token, essentially, you request payment for the Bitcoin you lent.
The flexible nature of blockchain technology, especially coupled with smart contract capabilities on some protocols, allows users to create and transfer IOU tokens easily. With the rise of ERC-20 and BEP-20 tokens, minting IOU tokens is an easy and effective way to denote debt in the cryptocurrency world. Much like traditional IOUs, crypto IOUs do not have a binding power. However, they are a very convenient way to keep debt relationships in check and have yourself a reminder of the money you borrow or lend.