In general, a contraction increases the Basket Factor. This is because for every FLOAT in circulation, we effectively have at least 100% of the value of that FLOAT at the target price available from the Basket or by minting new BANK. In a contraction, we buy (and burn) this FLOAT off the market for below its target price. This means that the difference between the FLOAT target price and the price we bought it for is spare money that we can keep in the Basket.
In general, an expansion is more tricky. In an expansion, we sell FLOAT to the market for 100% of its Target Price + some additional amount. When the Basket Factor is below 100%, every additional FLOAT sold (and therefore ETH is received in return) is effectively increasing the Basket Factor closer to 100%. In contract, when the Basket Factor is above 100%, every additional FLOAT sold effectively decreases the Basket Factor closer to 100%. In any expansion, BANK holders get rewarded with the profit from the trade. In a contraction, if the Basket factor is below 100% they are taxed due to the increase of supply.
The following table summarises each case:
Basket Factor | Expansion | Contraction |
Surplus | Decreases Basket Factor BANK burned (increases BANK price ceteris paribus) | Increases Basket Factor No change for BANK holders, (potential benefit in later versions). |
Deficit | Increases Basket Factor BANK burned (increases BANK price ceteris paribus but less than when Basket Factor >= 100%) | Increases Basket Factor BANK minted (decreases BANK price ceteris paribus) |