IOU represents a semi-formal document that indicates a debt relationship between two parties. It is an acronym for “I owe you” and may or may not contain the detailed guidelines of the debt owed between people or business owners.
Although they can be considered credible financial agreements, IOUs are not legally binding. Hence, a verbal agreement between two parties acknowledging a debt owed can be considered an IOU. They simply serve record-keeping purposes or as a reminder and acknowledgment of debt yet to be paid.
Although they are mainly used for monetary debts, IOUs can be issued for any sort of debt ranging from physical assets, goods, and sometimes, services.
How an IOU Work in Crypto
With the advent of blockchain technology, cryptocurrencies and smart contracts, IOUs can also exist as ERC-20 tokens known as IOU tokens. They serve a similar purpose to traditional IOUs – an acknowledgement of a debt relationship between two parties.
Suppose you lend out some crypto coins to a known party; the borrower can create an IOU token that will reside in your wallet and simply serve as a record of this transaction. Although the tokens do not serve as negotiable instruments, neither does it bind the borrower legally to the agreement, sending the IOU tokens back to the borrower can serve as a reminder or proof of payment confirmation of their outstanding debt.