A semi-formal document indicating a debt relationship between two parties is called an IOU. It stands for “I owe you” and might not contain detailed guidelines on the terms and conditions of the debt owed between the people.

Although they can be seen as credible financial contracts, these IOUs are not legally binding. An IOU can be as simple as a verbal agreement between two parties acknowledging the debt owned. They serve as records or reminders for the parties that the debt is yet to be cleared. IOUs are usually used for monetary debts but can be issued for other sorts of debts as well, like those of goods, services, or physical assets.

Blockchain technology has brought IOUs to exist on ERC-20 tokens, also called IOU tokens. They behave similarly to traditional IOUs, i.e., as an acknowledgment of the debt relationship between the parties. Simply put, if an investor lends out some crypto coins to some known party, the borrower can issue an IOU token which shall serve as a record of the transaction for both of them, residing in the wallet of the lender. Sending the IOU token back to the borrower reminds them of the debt owned or as proof of payment of their outstanding debt. They might not be considered instruments of negotiations nor do they bind the borrower legally to the contract.

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