Burn-and-Mint

The model creates a dynamic equilibrium between token supply and network demand. Users burn a base-layer token (e.g., ETH, BTC) or a protocol-specific utility token to access services, which permanently removes it from circulation. The protocol then mints a new reward token proportional to the value burned. This mechanism directly ties token issuance to proven economic activity, preventing inflation from unused supply.

Value is anchored to the burned asset, which is often a more established, exogenous cryptocurrency like Bitcoin or Ethereum. The act of burning creates a verifiable cost for service access, with the value of the newly minted tokens derived from this sunk cost. This creates a hard peg to external value, as the minted tokens represent a claim on the future utility of the network, backed by the destroyed capital.

The mechanism aligns incentives between users, service providers, and token holders.

• Users pay for services via burning, receiving newly minted tokens as rewards.
• Node Operators/Validators earn fees from the burn transaction and often receive a portion of the minted tokens.
• Token Holders benefit from a deflationary pressure on the reward token's supply as network usage increases burn rates.

Real-world implementations demonstrate the model's flexibility:

• Threshold Network (tBTC): Users burn ETH to mint tBTC, a Bitcoin-backed asset on Ethereum.
• Helium Network: Hotspot providers burn HNT tokens to mint Data Credits, which are the non-transferable, spend-only token for network data transfer.
• Axie Infinity (Old Model): Previously, players burned Smooth Love Potion (SLP) to mint new Axies, directly linking game asset creation to resource consumption.

Accurate and secure price oracles are critical. The minting function must calculate how many new tokens to issue based on the market value of the burned assets. This requires a trusted external data feed (oracle) to determine the exchange rate between the burned asset and the minted token. Oracle manipulation or failure can break the intended economic model.

Often confused, these are distinct mechanisms:

• Burn-and-Mint: Burns Asset A to create Asset B. It's a supply-side mechanism for a new token.
• Buyback-and-Burn: Uses protocol revenue to buy and permanently destroy existing tokens of Asset A from the open market. It's a demand-side mechanism for an existing token, similar to a stock buyback. Burn-and-mint is proactive creation; buyback-and-burn is reactive destruction.

The fundamental purpose of BME across protocols is to create a cryptoeconomic backstop. The native token's value is programmatically linked to the Total Value Secured (TVS) or utility of the network. Burning on usage creates scarcity, while controlled minting rewards validators. This aims to prevent token value dilution and align incentives between users, stakers, and the protocol's growth.

Protocols fine-tune their equilibrium using adjustable parameters:

• Expansion Rate: The rate at which new tokens are minted for staking rewards.
• Contraction Mechanism: The rate/burn ratio from fees or asset redemptions.
• Target Ratio: The ideal ratio of native token value to secured external assets (e.g., THORChain's 1:3). Governance often controls these parameters to manage inflation and security.

The BME model's mint rate is typically calculated using an external oracle price feed for the utility token. An attacker who manipulates this price can:

• Artificially inflate the token price to mint excessive protocol tokens, diluting holders.
• Depress the token price to reduce the burn rate, undermining the deflationary mechanism. This creates a critical dependency on oracle security and robust price feed aggregation.

A malicious actor could execute high-frequency, low-value transactions to repeatedly burn and mint tokens. This transaction spam aims to:

• Capture a disproportionate share of newly minted rewards without providing real utility.
• Increase network congestion and fees for legitimate users. Mitigations include mint caps, cooldown periods, and fee structures that disincentivize micro-transactions.

In some implementations, the burn function or the treasury managing minted tokens may be controlled by a multi-sig or DAO. Risks include:

• Custodial Risk: Compromise of treasury keys could lead to uncontrolled minting.
• Governance Attack: A malicious proposal could alter mint/burn parameters to extract value. Transparent, time-locked governance and non-custodial burn mechanisms are essential countermeasures.

When BME is used to stabilize an asset's peg (e.g., a stablecoin), the system relies on arbitrageurs to burn the stable asset when it's below peg. Failure modes include:

• Reflexivity: A falling utility token price reduces the incentive to burn, weakening the peg defense.
• Liquidity Crunch: Insufficient liquidity in the utility token market can prevent effective arbitrage, causing a peg break.

The model's health depends on continuous, real economic demand for the protocol's services to drive token burns. Key risks are:

• Demand Collapse: If service usage falls, the burn rate drops, removing the deflationary pressure and potentially leading to token inflation if minting continues.
• Parameter Sensitivity: Poorly calibrated mint ratios, vesting schedules, or supply caps can lead to unsustainable inflation or deflation.

When a BME token is integrated into DeFi protocols (e.g., as collateral), novel risks emerge:

• Oracle Dependency Amplification: The token's value, derived from oracle feeds, creates a second-order oracle risk for any protocol that accepts it as collateral.
• Liquidation Cascades: A sharp drop in the utility token's price could trigger simultaneous liquidations in multiple integrated protocols, exacerbating the sell-off.

The burn-and-mint equilibrium is the foundational process. Users burn a native token (e.g., $TOKEN) on its source chain by sending it to a verifiable, unspendable address. This destruction is cryptographically proven to a minting contract on a destination chain, which then mints an equivalent, pegged representation of the asset (e.g., peggedTOKEN). The model often uses a minting fee or bridge fee, a portion of which is permanently burned, creating a deflationary pressure on the native supply.

This model is predominantly used by cross-chain messaging protocols and token bridges to facilitate asset transfers without relying on locked liquidity pools. Examples include:

• Chainlink's CCIP & Cross-Chain Interoperability Protocol: Uses a burn-and-mint model for transferring LINK and other tokens across chains.
• Axelar Network: Burns assets on source chains to mint canonical wrapped representations (e.g., axlUSDC) on connected chains.
• Wormhole's Native Token Transfers (NTT): A standard for native token transfers using burn-and-mint, separating token ownership from bridge security.

Burn-and-mint directly impacts token supply dynamics. The continuous burning of the native token for cross-chain utility creates a deflationary sink. The net supply change depends on the balance between new token issuance (e.g., staking rewards, ecosystem incentives) and the burn rate from bridging activity. This aligns token value accrual with network usage, as increased cross-chain transactions increase burn rate, theoretically increasing scarcity.

• Capital Efficiency: Eliminates the need for large, locked liquidity pools on destination chains, freeing capital.
• Unified Liquidity: All liquidity remains on the native chain, creating a single deep pool rather than fragmented pools.
• Native Security: The bridged asset's security is ultimately backed by the security of the native chain, not a third-party custodian.
• Simplified Composability: Creates a canonical, wrapped asset on foreign chains that can integrate natively with local DeFi protocols.

• Bridge Dependency: Users must trust the security and liveness of the verification layer (oracle network, validator set) that proves the burn to the minting contract.
• Supply Shock Risk: A sudden, massive minting event on a destination chain (if the bridge is compromised) could inflate the wrapped supply without a corresponding native burn.
• Regulatory Scrutiny: The minting of new tokens on a destination chain may have different regulatory implications than pool-based models.
• Complexity: More complex to implement and audit than simple lock-and-mint bridges.

Burn-and-mint is often contrasted with the lock-and-mint (or lock/unlock) model used by bridges like Polygon PoS.

Lock-and-Mint:

• Native tokens are locked in a custodian contract on Chain A.
• An equivalent wrapped token is minted on Chain B.
• To redeem, the wrapped token is burned on Chain B, unlocking the native on Chain A.
• Liquidity is locked and fragmented.

Burn-and-Mint:

• Native tokens are burned on Chain A.
• An equivalent wrapped token is minted on Chain B.
• To redeem, the wrapped token is burned on Chain B, minting native on Chain A.
• Liquidity remains unified on the native chain.

A consensus or token distribution mechanism where miners or participants prove they have burned (permanently destroyed) a cryptocurrency, typically to earn the right to mine or receive new tokens. It is a foundational concept that burn-and-mint models adapt for economic utility, not consensus.

• Purpose: Often used as an alternative to Proof of Work to allocate mining rights without high energy costs.
• Example: Slimcoin uses PoB for block creation.

The irreversible act of sending tokens to a cryptographically verifiable address (e.g., a burn address like 0x000...dead) from which they can never be spent, permanently reducing the total supply. This is the core destructive action in the burn-and-mint cycle.

• Effect: Creates deflationary pressure and can increase scarcity.
• Verification: All burns are recorded immutably on-chain for transparency.

A tokenomic model where the supply of tokens in every holder's wallet is adjusted periodically based on a target price or index, unlike burn-and-mint which mints new tokens to a protocol treasury. Both aim for price stability but through different mechanics.

• Key Difference: Rebasing changes wallet balances; burn-and-mint changes total supply via discrete burns and mints.
• Example: Ampleforth uses a rebasing mechanism to target price stability.

A specific implementation of token burn where a portion of the transaction fees (base fee) is permanently destroyed within the protocol's native economic system. This creates a deflationary counterbalance to new issuance, similar to one half of the burn-and-mint equilibrium.

• Protocol: Ethereum's EIP-1559 burns ETH from every transaction.
• Impact: Net ETH supply can become deflationary when burn exceeds new issuance (staking rewards).

A class of cryptocurrencies that use on-chain algorithms (like burn-and-mint) to maintain a peg to a stable value, such as $1 USD, without being backed by off-chain reserves. Burn-and-mint is a common mechanism for these systems to expand and contract supply.

• Mechanism: To maintain the peg, the protocol incentivizes users to burn tokens when price is low and mints new ones when price is high.
• Example: The original Basis Cash protocol employed a burn-and-mint model.

A smart contract-controlled pool of assets that receives newly minted tokens in a burn-and-mint model. This treasury is used to fund protocol operations, provide liquidity, or back the value of the ecosystem tokens. It is the destination for the "mint" side of the equilibrium.

• Function: Manages the inflow of value from burning and distributes minted assets according to governance.
• Critical Role: The health and management of the treasury is vital for the long-term stability of the model.