Carbon Burn-and-Mint

Carbon Burn-and-Mint is a dual-token economic model where a reserve-backed stablecoin is "burned" (destroyed) to mint (create) the network's native governance and staking token. This mechanism, pioneered by the Celo platform, inverts the typical collateralized debt position model. Instead of locking collateral to mint a stable asset, users burn the stable asset to acquire the volatile network token (CELO). This creates a direct, market-driven link between the demand for Celo's stablecoins and the value of its core protocol asset.

The model operates through an on-chain reserve that backs stablecoins like cUSD with a basket of crypto assets, including CELO, Bitcoin, and Ethereum. When a user wishes to acquire CELO, they send stablecoins to a smart contract, which burns them and mints new CELO tokens at a rate determined by a continuous on-chain oracle for the CELO price. Conversely, to mint new stablecoins, users lock CELO and other reserve assets as collateral. This burn mechanism for CELO acquisition acts as a built-in buy pressure and sink for the stablecoins.

Key advantages of this architecture include programmatic price stability for CELO, as burning stablecoins reduces their supply when demand for CELO is high. It also aligns incentives, as the network's growth in stablecoin usage directly increases demand for the native token. The Carbon name derives from the carbon cycle analogy, representing a continuous, circular flow of value between the stable asset and the governance token, ensuring the system remains balanced and responsive to market forces.

Carbon Burn-and-Mint is a dual-token economic model where a volatile utility token (SWTH) is burned to mint a stable reserve token (CARBON), creating a deflationary pressure on the utility token while backing the stable token's value. This mechanism, a core feature of the Carbon blockchain, is designed to align network security incentives with long-term value accrual for participants. Unlike traditional proof-of-stake systems that rely solely on token inflation for security, the Burn-and-Mint model directly ties the cost of securing the network (burning SWTH) to the creation of a stable asset with intrinsic utility.

The process operates on a continuous cycle. Users and applications burn SWTH tokens to mint new CARBON tokens at a predetermined minting ratio. The newly minted CARBON is a stablecoin, typically pegged to a basket of assets or a fiat currency like the US dollar, designed for use in payments and as a stable store of value within the ecosystem. The burning of SWTH permanently removes those tokens from circulation, creating a predictable, deflationary force on its total supply. This directly contrasts with inflationary reward models, aiming to make the utility token more scarce over time as network usage grows.

Network security is funded through this burn activity. A portion of the SWTH burned is allocated to validators and delegators as rewards for securing the Carbon blockchain via its delegated proof-of-stake (DPoS) consensus. This creates a direct economic link: increased demand to mint CARBON (driven by its utility) leads to more SWTH being burned, which in turn funds higher security rewards. The model incentivizes validators to support the network's growth and stability, as their earnings are tied to the fundamental usage and demand for the CARBON stablecoin.

Key parameters govern the system's economics. The minting ratio (how much CARBON is minted per SWTH burned) and the reward distribution split between burned tokens and security providers are set by on-chain governance. This allows the Carbon community to adjust the model in response to market conditions and network objectives. The design aims to achieve a balance where the cost to mint CARBON (the SWTH burn) is economically rational for users, while providing sufficient incentives to maintain a robust and decentralized validator set.

The ultimate goal of the Burn-and-Mint model is to create a self-sustaining economic loop. Usage of the Carbon blockchain for stable transactions increases demand for CARBON, leading to more SWTH burns. This burn reduces SWTH supply and funds security, making the network more attractive and secure, which further drives adoption. This flywheel effect is intended to decouple security funding from pure token inflation, linking it instead to tangible utility and organic network growth.

The Carbon Burn-and-Mint mechanism is a dual-token economic model where a volatile utility token (C02) is burned to mint a stable reserve token (CSR), with the process governed by a bonding curve and backed by a reserve of external assets. This creates a closed-loop system: demand for the stable CSR token drives the burning of C02, creating deflationary pressure, while the protocol's revenue from fees and arbitrage replenishes the reserve, ensuring CSR's stability. The mechanism is designed to be self-sustaining, aligning economic incentives between token holders and the protocol's long-term health.

The process begins when a user interacts with the bonding curve to acquire CSR. To mint one CSR, a corresponding value of C02 tokens must be burned based on the current price set by the curve. This burning permanently removes C02 from circulation, reducing its supply. The protocol does not simply create CSR from nothing; the newly minted CSR is fully collateralized by the reserve, which holds assets like USDC or ETH. The price for minting CSR (and the required amount of C02 to burn) increases as more CSR is in circulation, creating a predictable and transparent minting cost.

Conversely, when a user wishes to exit the system, they can redeem their CSR tokens. Upon redemption, the protocol burns the CSR and releases the proportional share of assets from the reserve back to the user. Critically, this redemption also triggers the minting of new C02 tokens, which are distributed to C02 stakers as a reward. This minting during redemptions introduces new C02 supply, creating a balancing counter-cycle to the burn phase. The system's parameters are tuned so that net C02 emissions are controlled, aiming for a deflationary trend over time as protocol usage grows.

The reserve is the cornerstone of this mechanism, acting as the stabilizing foundation for CSR. It accrues value through multiple channels: a percentage of every C02 burn, fees from CSR redemptions, and arbitrage revenue generated within Carbon's decentralized exchange infrastructure. This growing reserve not only backs the outstanding CSR supply but also funds the protocol-owned liquidity and community initiatives. The health of the system is often measured by the collateral ratio—the total value of the reserve versus the total value of minted CSR—ensuring the stable token remains reliably backed.

In practice, this creates a dynamic equilibrium. High demand for the stable CSR token leads to aggressive C02 burning, scarcity, and potential price appreciation for C02. If demand for CSR falls and redemptions occur, new C02 is minted, increasing supply and applying downward pressure on its price. This cyclical burn-and-mint process directly ties the utility and stability of CSR to the economic performance and scarcity of C02, making the entire ecosystem responsive to market forces while maintaining a core of stable value for users and developers.