Contraction Example
As an example, let's say the FLOAT target price was $2.00 and the market price was $1.50
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- In this instance, the protocol would offer to buy FLOAT from the market at increasing price increments (starting at $1.50 and moving up to $2.00).
- Logically, arbitrageurs will buy FLOAT from the market and sell it to the protocol until the point that the market price is closer to target (assuming a profit can be made by buying FLOAT from the market and selling it to the protocol).
- When buying FLOAT, the protocol pays a blend of ETH and BANK. In general, it pays $1.50's worth in ETH and the rest (target price - market price) in BANK. The ETH/BANK blend depends on whether there is a surplus/deficit of ETH in the basket.
- The ETH used to buy FLOAT is from the Basket.
- The BANK used is minted ex-nihilo.
- The FLOAT bought from the arbitragers is immediately burned, providing positive price pressure.