To explain how IOU works, let’s take an example where you lend a cryptocurrency to another party. To show proof that you lent cryptocurrency to someone, the party borrowing will create an IOU token which is stored in your crypto wallet.
There was a lot of talk about IOU tokens over the last few days. This was after a leaked audio recording indicated that Celsius could use these “wrapped tokens” to repay its indebted clients.
Celsius customers can either redeem these wrapped IOU tokens, exchange them over the open market or hold onto them if they expect Celsius to recover in the long run. But what are IOU tokens, and how do they work? Let’s find out.
What is an IOU token?
IOU is short for “I owe you”. This refers to any document that states and acknowledges a certain amount of debt owed between two parties. And with technological advancements, these contracts have also been adapted to blockchain technology.
The blockchain enables the creation of IOU tokens that represent debt and can easily be traded between blockchains. To explain how this works, let’s take an example where you lend a cryptocurrency to another party. To show proof that you lent cryptocurrency to someone, the party borrowing will create an IOU token which is stored in your crypto wallet.
Although IOUs are not legally binding, they are a great way to keep track of and denote the funds that you have lent. In the case of Celsius, they also provide customers with a viable alternative method for repaying customers.
In the leaked recording, Nuke Goldstein, co-founder and CTO of Celsius, can be heard outlining the plan to compensate customers. Goldstein said that customers who have deposited funds in Celsius”https://www.cnbctv18.com/”Earn” accounts would be issued a wrapped token which will serve as an IOU.
This IOU token will represent the ratio of the amount owed to the customers and the assets that are available with Celsius. Goldstein added that if customers redeem their tokens after a while, the gap between the owed amount and the company assets could get smaller. This would help customers recoup more of their funds. The value of the IOU token is also expected to go up because Celsius has incoming revenues from various streams, including mining, staking, etc.
However, since these IOU tokens can be redeemed or traded, their value is determined by market forces. This makes these IOU tokens a risky wager considering a bankrupt lender is issuing them.
Further, Celsius is not the only firm to employ IOU tokens. A couple of weeks ago, the Chinese multi-cryptocurrency mining pool, Poolin, also announced that it would be issuing IOU tokens. This is being done to “minimise the impact of withdrawal suspension” on customers, which was implemented due to liquidity issues.
Poolin will issue IOU tokens after calculating the balances of the users. These tokens will be pegged in a 1:1 ratio with the user’s holdings and will be given to those who are unable to withdraw their holdings of Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Zcash (ZEC), Litecoin (LTC) and Dogecoin (DOGE).
Users can withdraw these tokens at any time. They can also be used to buy new mining machines or shares in Poolin’s U.S company. Poolin intends to burn these IOU tokens gradually, but the users on Poolin’s Telegram channel didn’t receive this idea well.
IOU tokens have become a valuable tool for companies facing liquidity issues. These tokens represent debt and compensate users who have been victims of exploits or cannot withdraw their funds.
The crypto industry is currently going through a rough bear market. And liquidity issues may arise more frequently given the current market conditions. Therefore, if the IOU attempts by Celsius and Poolin achieve any success, they could be used more extensively in the future.