At the beginning of FLOAT’s life, since you pay for FLOAT with an equivalent value of ETH, the Basket should equal the total value of FLOAT.
The ratio between the value of the Basket and the total value of FLOAT at target price is called the Basket Factor. Therefore, at the beginning, the Basket factor should equal 100%. In general (until changed by a governance vote), the Target Basket Factor will be 100%.
Over time, the Basket Factor will change. For instance, because the value of ETH is volatile, at any one time the collateral factor may be above or below 100%.
In every contraction or expansion auction, the protocol aims to move the Basket Factor to its target price
Since the system starts with a 100% Basket factor, in the early stage of the protocol there should be high confidence that the protocol can stabilise the FLOAT price in times of a lack of demand by contracting its supply. If confidence in the stability of the protocol increases over time, the Basket factor could be decreased at the discretion of the Float Protocol governance.