Chapter 1. What Is the Token Economy?
Token economics can be understood as a subset of economics that studies the economic institutions, policies, and ethics of the production, distribution, and consumption of goods and services that have been tokenized. This report outlines the current state of tokenization of our economy and discusses potential effects and dynamics of a future “token economy.”
Blockchain technology seems to be the driving force of the next-generation internet, what many refer to as Web3.1 Web3 enables tokenized economic interactions without intermediaries (see Figure 1-1). It provides a unique set of data, a universal state layer, also referred to as the ledger, which is collectively managed by a network of untrusted computers. This unique state layer allows us to send digital values in the form of tokens entirely peer to peer (P2P), circumventing the double-spending problem.2 Sending digital values over the web has therefore become as cheap and easy as sending an email. As of April 2019 more than 2,200 publicly traded tokens are listed on CoinMarketCap, and more than 175,000 Ethereum token contracts were found on the Ethereum main network. In June 2019, social media giant Facebook announced that it is working on its own token (the Libra token) and Web3 infrastructure (the Libra network).
Tokens, as an application of blockchain and derived technologies, might therefore prove to be as revolutionary as the emergence of the World Wide Web as an application of the internet. In the early 1990s, when Tim Berners-Lee introduced a new standard—Hypertext Markup Language, or simply HTML—that allowed us to create visually appealing web pages with just a few lines of code, it allowed anyone to “surf the web” following links instead of using command-line interfaces. However, most people back then did not know how to code HTML, nor did they know how to create meaningful and user-friendly websites with appealing content. For a long time, many websites just said “Hello World” and often did not have any other content displayed, or they just listed a collection of links to other websites. It took us almost a decade to figure out how to use websites beyond the scope of online directories and online billboards, and when we did, the Web2 emerged. Compared to those early days of the web, we are at a very similar stage when it comes to understanding what we can potentially do with tokens as an application of blockchains and the Web3.
Although early blockchain tokens were first minted only as part of the incentive scheme of the underlying blockchain protocols, with the advent of the Ethereum network, tokens have moved up the technology stack. Ethereum has made it easy and cheap to issue a token with just a few lines of code—with a simple smart contract and without the need to build your own blockchain infrastructure. The challenge, however, is that most people still don’t know what to do with these tokens, or how to properly design them. The space still lacks best practices.
The existence of tokens in general and digital tokens in particular is not new, but the speed with which these cryptographic tokens are being deployed and issued is an indicator that they might be the game-changing application of blockchain many people have been waiting for. However, though more and more people are starting to create and invest in cryptographic tokens, at this early stage of the technology the understanding of different token types and their potential application is still limited, even among professional investors and seasoned members of the blockchain community. To add to the confusion, terms like “cryptocurrency,” “crypto assets,” and “tokens” are very often used synonymously. The media mostly tends to refer to these new assets as “cryptocurrencies,” which is often used to describe a diverse range of “crypto assets” or “tokens” that could represent all sorts of physical or digital goods, such as a security, a collectible, a royalty, a reward, or a ticket to a concert. I would, therefore, like to argue that the term “cryptocurrency” is not ideal, because many of these new assets were never issued with the intention of representing money in the first place. “Cryptographic asset” would be a more generic term that we could use for certain types of tokens. The term “token” however, is even more generic and encompasses all tokens, not just asset tokens.
What Is a Token?
Cryptographic tokens represent programmable assets or access rights, managed by a smart contract and an underlying distributed ledger such as a blockchain network. These tokens are often issued with just a few lines of code, using a simple smart contract running on a distributed ledger. Contrary to what the metaphor might suggest, a token does not represent a digital file that is sent from one device to another. Instead, it refers to the aforementioned asset and/or access rights that are collectively managed by a network of computers, a blockchain network, or some other distributed ledger. The distributed ledger hereby provides a public infrastructure in the form of a distributed record of transactions that is stored on multiple computers in the network, and it keeps track of which wallet address is the owner of which token.
Token contracts are a specific type of smart contract. They define a bundle of conditional rights assigned to the token holder. Tokens can represent anything from a store of value to a set of permissions in the physical, digital, and legal world. They can also incentivize an autonomous group of people to individually contribute to a collective goal (as in the case of Bitcoin). These “purpose-driven tokens” are created upon proof of a certain behavior. Tokens are digital assets or access right tools that have the ability to facilitate collaboration across markets and jurisdictions. They allow more transparent, efficient, and fair interactions between market participants, at low cost.
Digital assets are not a new thing, but cryptographic tokens on the blockchain have lower issuance and management costs involved. A big part of the lower cost results from the fact that the transaction validity of the business process itself is enforced dynamically (on the fly). This is very different from traditional settings, in which the validation of financial operations consists of labor-heavy auditing systems to avoid “misbehavior.” Replacing human resource–heavy tasks that requires domain expertise with automated real-time cryptographic proof of oversight can reduce costs of bureaucracy by orders of magnitude; depending on the industry and use case, the exact numbers will vary. As a result, cryptographic tokens can be easily issued and securely traded on a blockchain network, without an intermediary or escrow service. Whereas state-of-the-art digital assets are controlled by centralized entities, they can now be issued with a few lines of code and managed by a public and verifiable infrastructure like a blockchain network.
The ability to deploy tokens at a low cost relatively effortlessly on a public infrastructure is a game changer, because it makes it economically feasible to represent certain types of assets and access rights that might not have been feasible before. Examples thereof are fractional ownership of art or real estate. Fractional ownership tokens of real-life assets like art and real estate might improve the liquidity and transparency of existing asset markets with traditionally low liquidity. Such token types might also fundamentally affect our market dynamics and economic interactions, much more than might meet the eye at such an early stage of their existence.
History of Tokens
Tokens are not a new thing, having existed eons before the emergence of blockchain. Traditionally, tokens have represented different forms of economic values. Shells and beads were probably the earliest types of tokens used. Other, decidedly more recent types of tokens are, for example, casino chips, vouchers, gift cards, bonus points in a loyalty program, coat check tokens, stock certificates, bonds, concert or club entry tokens represented by a stamp on your hand, dinner reservations, ID cards, club memberships, or train or airline tickets. Most tokens come with some kind of built-in anti-counterfeiting measures, which might be more or less secure, to prevent people from cheating the system. Paper money or coins are also tokens. Tokens are furthermore used in computing, where they can represent a right to perform some operation or manage access rights. A web browser, for example, sends tokens to websites when we surf the web, and our phone sends tokens to the phone system every time we use it. A more tangible form of computer tokens is the tracking codes of postal service or a QR code that gives you access to a train or plane. In psychology, tokens have been used as a positive reinforcement method of incentivizing desirable behavior in patients, especially in a hospital setting. Cognitive psychology has been using reward tokens as a medium of exchange that can be traded for special privileges. These tokens are minted upon proof of certain behavior and could, depending on the use case, represent both assets and access rights.
In this historic context, cryptographic tokens that are managed by a blockchain network can combine all these concepts: access rights to some underlying economic value (property) or a permission to access the property or services of someone else or a collective good. This property or service can be public (the Bitcoin network) or private (an apartment that is rented out by a private person). Tokens can also be used to reward actions in a network—for example, the case of “Proof-of-Work” in the Bitcoin network, in which network actors are rewarded with Bitcoin tokens when they perform valuable security functions to keep the network safe.
Cryptographic tokens are accessible with a dedicated wallet software that communicates with the blockchain and manages the public–private key pair related to the blockchain address. Only the person who has the private key for that address can access the respective tokens. Asymmetric cryptography, which is the basis of key management, is an integral part of token security. The person with the private key can, therefore, be regarded as the owner or custodian of that token.3 If the token represents an asset, the owner can initiate transfer of the token by signing with his or her private key, which in turn generates a digital fingerprint or digital signature. A digital signature can prove that a set of data was provided or approved by a particular party. A digital fingerprint can ensure that the data provided is correct.
Although it is technically possible to represent any asset of the existing economy with a cryptographic derivative like a token, we still lack adequate taxonomy and adequate legal frameworks. The term “taxonomy” refers to the practice and science of classification of concepts including finding new terminologies (vocabulary) to adequately describe a certain scientific or practical domain. Because the Web3 and its applications are emerging socioeconomic phenomena powered by a new technological infrastructure, we still lack a standardized vocabulary to refer to application types. This makes communication around the topic challenging. Establishing a consistent and reliable taxonomy for token properties is needed to derive the classification of tokens, from a business-purpose perspective as well as from a regulatory perspective. Such a taxonomy is a necessary foundation from which developers, policy makers, and investors can make more sense of how to design, apply, or regulate tokens.
We are still in the very early stages of exploring different roles and types of tokens. Many terminologies that we use today might need to adapt to the realities of emerging use cases and should therefore be considered as temporary. With every new blockchain network and every new token application, we will collectively learn by trial and error about possible token use cases, and resulting classifications thereof. The classification presented in the next chapters intends to give a broad overview of the different properties and types of tokens, but it is by far not complete.
Properties of Tokens
Identifying different properties of a token can be used as a first step in fine-tuning a future classification framework. Understanding properties of a token is fundamental for modeling a token to fulfil a certain purpose and function. I would, therefore, like to introduce the most important perspectives from which we can deduce the properties of a token:
This classification of properties is in some cases binary; in other cases, the answer will lie on a gradient between the two extremes (see Figure 1-2).
From a technical perspective, tokens can be implemented on different layers of the technology stack, as either protocol tokens, second-layer tokens (like application tokens or tokens created on a sidechain), or multiasset ledger tokens (see Figure 1-3).
Protocol tokens, also referred to as intrinsic, native, or built-in tokens, have a very clear role in a blockchain network. They are part of a cryptoeconomic incentive mechanism4 to keep the network safe from attack by acting as block validation incentives (miner rewards), and for transaction spam prevention. The token, in this case, is an integral part of the incentive mechanism that steers the actions of network actors through positive reinforcement. Native-protocol tokens might furthermore be needed to pay for transaction fees in the network. Examples thereof are Bitcoin tokens, Ethereum tokens, Sia tokens, and others. These tokens are often referred to as “cryptocurrencies” or “coins.” However, I would like to argue that these terms are misleading. Although native-protocol tokens can be seen as the currency of the distributed internet tribe, technically speaking, they are all tokens: Bitcoin network (Bitcoin token), Ethereum network (Ethereum token), or Sia network (Sia token).
Second-layer tokens are created with a smart contract on an application level or on a sidechain. Second-layer tokens can represent a physical good, a digital good, or a right to perform an action in a network or in the real world. They can be issued as an application token managed by the underlying blockchain. In the case of Ethereum, there are token standards like ERC-20 that allow the creation of application tokens using a smart contract on the Ethereum network. Second-layer tokens can also be issued by a sidechain. A sidechain is a separate blockchain compatible with the main chain and has been used to resolve scalability issues in Bitcoin. Sidechain tokens are more dominant in the Bitcoin ecosystem. Sidechains that allow the creation of second-layer tokens are, for example, “Elements,” “Liquid,” or “Rootstock.” Second-layer tokens interact with a blockchain network, which manages the state of all tokens. Due to network effects, the value of second-layer tokens is likely to be interdependent with the value of the underlying native-blockchain token. An example thereof is the value of ETH (the native Ethereum token), which rose in the initial coin offering (ICO) bubble of 2016–2017 largely due to the amount of ETH that was needed to buy application tokens issued through token sales of ERC-20 tokens.
Multiasset ledger tokens like Ripple and Stellar allow the creation of multiple tokens on the native-blockchain level. Stellar allows anyone to create token contracts with all kinds of variables. On Ripple (XRP), everyone can issue any kind of token on the network, but they are issued as IOUs5—essentially debt. XRP is considered credit, which is why some call it the “credit network.” To get to use these tokens, others must enable trust to your wallet, which means that you transfer debt. Ripple and Stellar can therefore be regarded as a settlement bus for other assets. The tokens XRP and XLM are essentially protocol tokens, but in their networks they are representations of other assets, and those representations are used to track credits and debts in a multidimensional value space. We can think of them as nascent “cryptographically enforced forex networks.”
Tokens can represent a right to an economic value, whether digital or physical, long-term or temporary. A token can represent a right to an asset I own, which can be a unit of account or a unique good, or it can represent limited access rights to an asset someone else owns or a service someone else provides. The economic definition of an asset is a resource that has an economic value and is controlled by an individual or a legal entity or a country. The legal definition of an asset is anything that has monetary value attached to it. Ownership right is the legal right to possession of a thing, including all usage rights (physical and intellectual). In some countries, ownership is possible only in connection with physical things. Rights of use, or access rights, are contractual rights to use something in someone else’s possession. A token could represent ownership or temporary access rights to any type of public or private assets, utilities, or services of any kind. However, this is not a binary classification given that many use cases might be more hybrid in nature, like mining rights on a piece of land, which represent access rights but also represent a productive asset. Native-protocol tokens such as Bitcoin (BTC) and Ether (ETH) can be seen as assets, but they also represent access rights to the network because they are needed to pay for network fees.
If tokens represent assets I own, they act as a passive payload managed by a distributed ledger, including all properties, rights, and obligations it has in the system. Asset tokens can be either fungible or nonfungible. Fungible tokens represent ownership of any fungible physical goods such as money, silver, petroleum, gold, diamonds, shares in a company, or any collateralized debt instruments. They can be compared to commodity money and are therefore sometimes referred to as “crypto-commodities.” Asset tokens can also represent nonfungible goods, which is why they are often referred to as “crypto-goods.” Examples would be real estate tokens, crypto-collectibles, or tokens that represent unique pieces of art. Representing such assets with a token makes the assets more easily tradable and divisible, thus creating more liquidity for some assets that might not have been that easily tradable off-chain.
Tokens can also represent access rights that are limited in time or in scope for the use of an asset someone else owns or a service someone else provides. They can provide access to network services, an entry ticket to a concert, a public transport ticket, apartment-sharing access, car-sharing access, a time slot for a doctor’s appointment, or membership access to a club, among many examples. They could be used to allow you to start your car, which might have a smart lock; access alcoholic beverages, by proving that you are older than a certain age; board an airplane; enter your home; vote; cross a border; collect a tax refund; or get a discount, just to name a few examples.
In economics, fungibility refers to the interchangeability of each unit of a commodity with other units of the same commodity. Examples thereof could be any durable goods like precious metals or currencies. Fungible assets have two key properties: only quantity matters, which means that units of fungible assets of the same kind are indistinguishable; and any amount can be merged or divided into a larger or smaller amount of it, making it indistinguishable from the rest. If you were to lend $10 to someone, for example, it would not matter if that person returns the exact same $10 bill, a different $10 bill, or various bills and coins that amount to the value of $10. The same applies to one barrel of crude oil. Flour is another example of a fungible asset, and that’s one of the reasons why it was used as a commodity currency in the past. Fungibility is the essential feature of any currency or commodity if it needs to act as a means of exchange, a unit of account, and a store of value. Fungible cryptographic tokens can represent any physical or digital assets that are identical to one another and can therefore be easily replaced. They are not unique and are perfectly interchangeable with other tokens of their kind. If two parties have the same amount, they can swap them without losing or gaining anything. Unique tokens, on the other hand, are nonfungible. Examples thereof are ID cards, a token that represents the ownership of a house, a car, a piece of art, or a gym membership. If you lend a nonfungible token that is transferable to someone, you would expect them to return the same token. This is similar to a car that you lend to a friend. You would expect them to return the same car to you, not another car.
Protocol tokens such as Bitcoin or Ether and smart contract tokens such as ERC-20 tokens, are all examples of fungible tokens. Fungible tokens represent most of the tokens minted and issued through early tokens sales, until the emergence of the nonfungible token standard ERC-721 in 2017. It is important to note, however, that there are certain limitations of fungibility. Contrary to common belief, Bitcoin transactions are not fully anonymous but rather are pseudonymous. This means that you can use data analytics to correlate Bitcoin transactions with other metadata that might be publicly available or accessible to certain national security agencies. If someone behind a Bitcoin address becomes a person of interest, and the provenance of the token history becomes tainted or blacklisted, you might have problems trading your tokens. This can happen if you received your tokens from a person of interest who might be under suspicion for money laundering, terrorist activities, extortion, and so on, even if there were many token holders before you.
In such cases, authorities could correlate your Bitcoin address against other, more traditional data points that are subject to know-your-customer regulations (KYC), such as banks and exchanges, or even ecommerce platforms like Amazon. If you were to pay for your purchase on Amazon with Bitcoin, for example, and your tokens have a history that is tainted, Amazon might decide not to accept the payment. The fungibility of Bitcoin and similar tokens can therefore, be up for debate if the tokens’ history can be tracked and linked to illicit activity that makes them “tainted” and therefore limits their role as a medium of exchange. Therefore, Bitcoin and blockchains using similar cryptography to Bitcoin’s are not fungible in all cases. Newer blockchains like Monero and Zcash are working with alternative cryptographic tools that could make their tokens more fungible than Bitcoin.
Tokens can be programmed to be transferable or nontransferable, or to have restricted transferability. Unique (nonfungible) tokens can be transferable or nontransferable depending on the use case. A plane ticket might be transferable or nontransferable depending on the type of ticket you buy. A piece of art or the registration paper of your car, for example, is unique but transferable. Identity-bound tokens like certificates or licenses are nontransferable because it wouldn’t make sense to transfer your driver’s license or university diploma to someone else. A token that allows you to pick up your children from school is unique, but it could have some limited or temporary transferability to allow you to arrange for someone else to pick up your kids by temporarily granting that person pickup rights. Whereas fungible tokens tend to be transferable in most cases, there are also exceptions to the rule.
In economics, durability refers to the ability of a currency to withstand repeated use. This means that the substrate of that currency should not easily vanish, decay, or rot. Metals and foods such as wheat have high durability and were therefore often used as commodity money. The Bitcoin token and similar native-blockchain tokens have so far proven to withstand time, being resilient against any type of censorship or network attack. Durability refers to the fact that cryptographic tokens are secure against theft or attack. A resilient network is furthermore expected to contribute to a “relatively” stable long-term value of the token. If you can correlate network resilience to the value of the network token, the token can be expected to be durable because it will not cease to exist. As long as the network is robust and used, new tokens will be minted, and demand for tokens will increase. Token prices might decrease due to price fluctuations, but the token as such will not vanish as long as the network is intact. On the other hand, a network with a weak consensus protocol might be attacked and manipulated. In this case, token holders could lose their tokens if the state of the network—the ledger—is tampered with.
As opposed to tokens that represent assets or access rights to existing assets or services in the real world, tokens can also be pro grammed to incentivize a purpose. These purpose-driven tokens can be used to incentivize individual behavior or contributions to a collective goal of a group of people, if and when you bring proof of contributing to a collective goal. Bitcoin and other protocol tokens are good examples of such purpose-driven tokens. As such, purpose-driven tokens represent a new type of value creation and a mechanism to collectively manage a public infrastructure in the absence of third parties. Such purpose-driven tokens can also be used for rewards programs or loyalty programs. Although rewards programs are nothing new, the advent of cryptographic tokens has spurred a lot of innovation around purpose-driven tokens that incentivize behaviors that are beneficial to a collective of people. Examples of purpose-driven tokens are Climatecoin CO2 tokens, time-bank tokens, and curation tokens. Such tokens could prove to be a new incentive tool to reward individual contributions on the fly, as opposed to the after-the-fact disincentives most institutions currently use.
Tokens can have fixed supply, fixed-rate convergent supply, dynamic-rate convergent supply, or unlimited supply. Poker chips have a fixed price—they are one-to-one with the fiat currencies you trade them for—but they have unlimited supply. A casino can always produce more chips. Many of the tokens listed on CoinMarketCap, especially those that were used for early token sales to raise funds, have limited token supply, possibly because no investor wants to buy into an unlimited supply, because they want to protect their investment. This is especially true for tokens that represent currencies, assets, or equity, or debt-issuance of tokens. For tokens that represent an access right, the number of tokens is usually limited to the maximum capacities and frequency of the access provider. The only limit is the capacity of a system, such as the capacity of the busses of a public transport network, which can always be extended if necessary, most often including a time lag. What makes any money or a precious commodity such as gold valuable is that it is limited in supply. Any tokens with a limited supply could therefore be de facto stores of value, depending on the expected durability of value as well as the short-term volatility of their price. Fixed supply doesn’t necessarily occur frequently, and most people talk about fixed-rate convergent supply as if it is “fixed supply.” The supply of Bitcoin tokens would fall under the category of “fixed-rate convergent”, where the supply rate converges over time. Dynamic-rate convergent supply refers to the fact that the rate at which the supply is released is tied to systems-purpose metrics, so it rewards for a specific Key Performance Indicator (KPI) instead of time. Unlimited supply allows for open-ended dynamic minting of tokens according to some purpose metric or KPI. Unlimited supply might turn out to be a powerful token-supply mechanism, but it is not well understood yet, as we can see from Ethereum 2.0.
Another dimension revolves around the question of the token flow. Tokens might be created for a single purpose and destroyed when used. In this case, the token flow is linear—from source to sink. Examples thereof are casino chips that can be used only within the realm of the casino and are issued against a currency. A player leaving the casino can cash the chips back into local currency. A transportation ticket that pays for access to a system and then expires after a one-time use or after a period of time is another example. Their price is determined by the service provider (low volatility), and the supply is not limited, or it is limited to the infrastructural conditions. Such tokens must be destroyed by consumption or expiry date to complete the cycle. On the other hand, tokens that can be exchanged back and forth indefinitely, without an artificial expiration condition, can be said to have a circular flow. When you transfer the token (currency or piece of art), someone else receives the token. This person can spend the token to buy something or trade the token on an online exchange for another token. Tokens with a circular token flow will sink only if you lose your private keys, or if the underlying physical asset is accidentally destroyed.
Another question when designing a token is whether the token has an expiry date. Any fungible token might be programmed in a way such that it expires on a certain date to prevent hoarding of tokens. Practically speaking, the token would expire. Technically speaking, the token would change state. Bonus points of loyalty programs usually come with an expiry date. In the past, some regional currencies, such as the Wörgl Schwundgeld (Austria) in the 1930s, experimented with a built-in deflation to prevent hoarding and inflation. The currency was introduced as a parallel currency that could be spent only in the region of Wörgl. Because the currency lost 1% of its value each month, individual spending was encouraged, whereas saving was disincentivized. This measure was introduced to combat a countrywide deflationary policy and helped with both unemployment numbers and infrastructure investments.
Regulatory authorities all over the world are currently catching up on understanding the full potential and implications of this new technology. At such an early stage, it’s difficult for anyone to distinguish what is truly new from existing asset classes that are now simply represented by a new cryptographic derivative. Some tokens might represent completely new asset classes, such as native-protocol tokens, which very often have hybrid functions and are not easy to classify. Other tokens might simply represent assets of the existing economy that are easily classified, understood from a business logic perspective, and therefore also regulated. An example of assets that are easy to classify or regulate is “asset tokens,” in particular “security tokens.”
Regulation is a complex topic that could fill a book on its own, especially taking into account all 200-plus jurisdictions around the world. To simplify matters, at this point it is sufficient to say that regulators need to understand the aforementioned properties that a token can have in order to understand what they are potentially regulating before creating a clear legal token taxonomy. In this context, some tokens are easy to classify and regulate because they reflect known phenomena, whereas other types of tokens might be much more difficult to classify and regulate, especially tokens that have hybrid functions, which might require new legal constructs. Entrepreneurs in the latter case will always be confronted with uncertainties as to how the regulator might retroactively classify the token, which can lead to much anxiety in the market. To provide regulatory certainty to entrepreneurs, some jurisdictions have begun to cover governmental sandboxes to guarantee innovation while allowing for a process of regulatory learning.
1 Similar terms, like Web 3.0, are used by other domains. They often refer to a more intelligent or semantic web, including machine learning and AI, that focuses on the convergence of several key emerging technologies. In the context of blockchain, the term is used by many to refer to a more decentralized internet, and is generally called Web3, not Web 3.0.
2 The way the internet is designed today, you can spend the same value—issued as a digital file—multiple times, because digital information can be copied, and copies of that file can be sent from one computer to multiple other computers at the same time. Physical values, on the other hand, don’t have that problem. They cannot be easily replicated, as the parties involved in a transaction can immediately verify the physical token—a bill, a coin, or another object of value. Unlike digital files, physical values like bills and coins are designed to be difficult (and expensive) to copy.
3 From a regulatory point of view, however, it is not definitively clear whether or how it is possible to acquire ownership or possession of such tokens. Therefore, concepts such as custodianship would probably need legal modifications in many jurisdictions.
4 Cryptoeconomics is the interdisciplinary study of economic interaction in untrusted environments using cryptographic functions, where every actor could potentially be corrupt. Cryptoeconomics applies economic mechanisms in combination with cryptography to create robust decentralized P2P protocols.
5 Abbreviation for “I Owe You,” a written promise that you will pay back money that you borrowed. It is an informal document acknowledging debt. An IOU usually specifies the debtor, the amount owed, and sometimes the creditor. IOUs differ from promissory notes in that they do not specify repayment terms, such as the timing of repayment.