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Caramel can be made from sugar by heating it slowly to around 170° C (the particular temperature depends on the sugar, see caramelization). As the sugar melts and approaches this temperature, the molecules break down into other volatile compounds that give it the characteristic caramel color and flavors.
The word caramel also describes a soft, chewy caramel-flavored candy made by boiling milk and sugar together. Its color and flavor are due not to caramelization, but to the Maillard reaction, which occurs between an amino acid and a reducing sugar.