He hailed from a poor family the commandery of Guiyang 桂陽 (today's Binzhou 郴州, Hunan). With the age of 13 sui he became a palace steward (jishi 給事), but was then castrated and was appointed palace attendant (xiao huangmen 小黃門). During the reign of Emperor He 漢和帝 (r. 88-105 CE) he rose to the office of Palace Attendant-in-ordinary (zhongchangshi 中常侍), which gave him some influence on political matters.
Cai Lun was then made Director of the Imperial Manufactories (shangfang ling 尚方令) and was responsible for the supply of crafted objects for the imperial household. In this function he studied the art of papermaking, and suggested to establish an imperial factory for papermaking, whose products could replace the expensive and uncomfortable silk fabric (jianbo 縑帛) or bamboo slips (zhujian 竹簡) that were until then commonly used for writing.
After some experiments he submitted in 105 CE the result to the throne. This was a refined type of paper consisting of tree bark, hemp fibres, rag fabric (bibu 敝布) and discarded fishnets (yuwang 魚網). Interestingly enough, the character zhi 紙 is older than the invention of paper. It was used for silk fabric, not for paper (compare the radical).
Accepted by the Emperor, his paper was known as "paper of Marquis Cai" (Cai Hou zhi 蔡侯紙) because he was in 114 CE rewarded with the title of Neighbourhood Marquis of Longting 龍亭侯. Cai was also given the title of Chamberlain for the Imperial Stud (taipu 太僕) of the Changle Palace 長樂宮.
He was also a favourite of Empress Dowager Dou 竇太后, who entrusted him with the murder of Lady Song 宋貴人, the mother of the young emperor, for whom she reigned. When the latter, Emperor An 漢安帝 (r. 106-125 CE), became of full age, the case was ordered to be investigated. Cai Lun decided to kill himself.
Paper was one of the great inventions of China (si da faming 四大發明), the others being the compass, gunpowder, and printing.