Where you are. You have an issuer, its cage, its business model and its reserve disclosure. What you have not seen is how tokens come into existence at all, or what stops the issuer from simply creating more.
Here is a fact that surprises most people meeting this for the first time: you cannot buy a stablecoin from its issuer.
If you want tokens, you buy them from somebody who already has them, on an exchange. The issuer deals with a short list of vetted institutions, and those institutions are the only parties who ever wire dollars in and receive newly created tokens back. Everybody else trades in the second-hand market. That two-layer structure is not incidental; it is what makes the mechanism in the next lesson work at all.
The idea in one paragraph
Minting is the creation of tokens against dollars received, and burning is their destruction against dollars sent back. Both happen only between the issuer and an authorised dealer, and both are paired postings: a mint adds to reserve assets and to tokens in issue in the same transaction, and a burn subtracts from both. Because the two legs move together or not at all, the one-to-one invariant is preserved by construction rather than by periodic reconciliation. Supply is therefore not a decision anybody makes; it is a consequence of how much money the market has handed in, one mint and one burn at a time.
Wider than the screen; scroll it sideways.
Why both legs, always
The exercise replays five institutional flows and asserts the invariant after every single one, not merely at the end.
That is a deliberate choice and it is the lesson’s real content. A system that checks its invariant only at the close of business can be wrong all day and correct at midnight. Worse, a system that performs the two legs as separate operations has a window between them in which the books genuinely do not balance, and any failure landing in that window leaves it permanently wrong.
You have met this exact problem twice already. Module 3 called it delivery versus payment and solved it by making both legs atomic. Module 5’s clearing house called it settlement and solved it the same way. Here it is again, with tokens on one side and reserve assets on the other, and the same answer.
What the vetted list is for
Restricting direct dealing to a handful of institutions does three jobs at once.
It keeps the identity checks manageable, since the issuer is onboarding dozens of counterparties rather than millions. It makes each interaction large enough for a bank wire to be sensible, which a hundred-dollar redemption would not be. And it concentrates the redemption right in the hands of parties with the capital and the motive to use it constantly, which is precisely what the next lesson needs.
Supply as a consequence
One implication is worth stating plainly, because it separates this design from the money creation of module 1.
A bank creates deposits by lending: it decides to make a loan, and new money exists as a result of that decision. An issuer creates tokens only when somebody hands it dollars. The issuer has no lever to expand supply and no reason to want one, since every new token arrives with its own backing attached. Supply moves because demand moved, and never for any other reason.
That is why the supply figure is a useful measure of demand and a useless measure of the issuer’s intentions.
Check yourself
1. You want a thousand tokens. Where do you get them?
From somebody who already holds them, on an exchange. The issuer deals only with a vetted list of institutions, who are the only parties that wire money in and receive newly minted tokens. Everyone else trades in the secondary market.
2. Why does the exercise assert the invariant after every posting rather than at the end of the run?
Because a system that is only correct at the close of business can be wrong all day, and a mint performed as two separate operations has a window in which the books genuinely do not balance. A failure landing in that window leaves a state that cannot be repaired from inside the system.
3. Why restrict direct dealing to a short list at all?
It keeps identity checks manageable, keeps each interaction large enough for a bank wire to make sense, and concentrates the redemption right among parties with the capital and the motive to exercise it constantly. The last of those is what makes the next lesson possible.
4. A bank creates deposits by lending. How is minting different?
An issuer creates tokens only against money it has received, so every token arrives with its backing attached and the issuer has no lever to expand supply independently. Supply is a consequence of demand rather than a decision, which is why the outstanding figure measures demand and tells you nothing about the issuer’s plans.
Do this
Implement both operations and replay a day.
python3 code/mint_burn.pyThe starter leaves you mint and burn as paired postings, with the burn refusing when a dealer does not hold the tokens. The assertions check the invariant after every one of the five flows, that the closing supply is 420,000 against equal reserve assets, and that burning tokens nobody holds is refused.
The completed version is in solutions/mint_burn.py.
What you can now do. You can implement mint and burn as atomic paired postings, explain why the invariant is checked at every step rather than at the close, and say why the vetted-dealer structure exists. The next lesson uses that structure to answer the question this module has been circling: what actually holds the price at a dollar?