> For the complete documentation index, see [llms.txt](https://docs.inverse.finance/inverse-finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.inverse.finance/inverse-finance/inverse-finance/getting-started/core-concepts.md).
# Core Concepts
Understanding a few fundamental concepts will help you navigate Inverse Finance and DeFi more effectively. This page explains the essential terms and mechanisms you'll encounter throughout our documentation and when using our products.
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**Already familiar with DeFi?** Jump to Guide for Beginners to learn more about how to get started with our unique suite of products.
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***
### DeFi Fundamentals
Stablecoins
**What they are:** Cryptocurrencies designed to maintain a stable value relative to an external reference, typically the US dollar.
**How DOLA works:** DOLA is a **debt-backed stablecoin**-it is created when users borrow against crypto collateral on FiRM. Each DOLA in circulation is backed by more than $1 worth of collateral held in the protocol, plus additional safety buffers.
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**Key difference:** Unlike algorithmic stablecoins, DOLA is over-collateralized with crypto assets and uses market-driven mechanisms to maintain its peg.
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Collateral
**What it is:** Assets you deposit to secure a loan. In DeFi lending, you deposit crypto into a protocol, which locks it while you borrow a different asset (like DOLA). If collateral value drops too much relative to your loan, the protocol can sell your collateral to repay the debt.
**Common collateral types on FiRM:**
* **WETH** - Wrapped Ethereum
* **wstETH** - Wrapped staked ETH (Lido)
* **CVX** - Convex governance token
* **INV** - Inverse Finance governance token
* **sUSDe** - Ethena's yield-bearing USDe stablecoin
* **DOLA-wstUSR LP** - Sunset. Historical Resolv Labs LP; do not use as new collateral
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**Important:** Different collateral types have different risk profiles and borrowing capacities. Always understand the specific risks of the collateral you're using.
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Collateral Factor
**What it is:** The maximum percentage of your collateral's value that you can borrow.
**Example:**
* You deposit $10,000 worth of ETH
* ETH has an 85% collateral factor on FiRM
* You can borrow up to $8,500 DOLA
* Your loan-to-value (LTV) ratio is 85%
**Why it's not 100%:** The buffer protects the protocol from rapid price drops.
| Collateral Factor | What You Can Borrow | Risk Level |
| ----------------- | ------------------- | ------------ |
| 65% | $6,500 per $10,000 | Conservative |
| 75% | $7,500 per $10,000 | Moderate |
| 85% | $8,500 per $10,000 | Aggressive |
| 90%+ | $9,000+ per $10,000 | High Risk |
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**Best Practice:** Even if your market allows 85% collateral factor, consider borrowing only 70-75% to protect against volatility and liquidation risk.
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Liquidation
**What it is:** The forced sale of your collateral to repay your loan when collateral value falls too low relative to your debt. Maintain conservative LTV ratios, monitor positions, and keep extra collateral ready to add if needed.
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**Critical:** Liquidation is permanent and happens automatically. Always maintain a safety buffer.
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Yield & APY
**Yield:** Returns earned on deposited or staked crypto. **APY** is annualized including compounding; **APR** is the simple annualized rate without compounding.
**Where yield comes from in Inverse Finance:**
* **sDOLA:** DBR revenue from FiRM borrowers
* **sINV:** DBR revenue + anti-dilution INV rewards
* **jrDOLA:** DBR insurance premium + sDOLA base yield
* **INV staking:** Anti-dilution rewards + DBR streaming
***
### Inverse Finance-Specific Concepts
Governance & DAOs
**DAO:** An organization controlled by token holders through on-chain voting. INV holders govern Inverse Finance: 1 INV = 1 vote. Governance sets FiRM parameters, budgets, upgrades, tokenomics, and emergency actions.
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**Get involved:** Forum discussion and voting help shape the protocol even with smaller INV holdings.
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FiRM
**What it is:** Inverse Finance's fixed-rate lending protocol. Buy DBR upfront to lock borrowing cost for any duration. Features include Personal Collateral Escrows, Pessimistic Price Oracles, and retained voting rights for governance tokens used as collateral (where applicable).
DBR (DOLA Borrowing Rights)
**What it is:** An ERC-20 token that represents the right to borrow DOLA on FiRM. One DBR lets you borrow one DOLA for one year at zero interest. DBR balance decreases while you have a loan; when DBR hits zero, forced replenishment is expensive. Always keep a buffer.
Personal Collateral Escrow (PCE)
**What it is:** Your own isolated smart contract holding FiRM collateral. Problems in one market cannot affect your positions in other markets.
Pessimistic Price Oracle (PPO)
**What it is:** A conservative price feed that uses the lower of two oracle prices for collateral valuation, reducing oracle manipulation risk.
ERC-4626 Vaults
**What they are:** Standardized yield-bearing vault tokens. Inverse Finance vaults include **sDOLA**, **sINV**, and **jrDOLA**.
Tranches (Senior vs Junior)
**Senior (sDOLA):** Lower risk, lower yield, paid first. **Junior (jrDOLA):** Higher risk and yield; absorbs first losses (slashing possible).
***
### Next Steps
**Ready to try Inverse Finance?**
* [Get Started with FiRM](/inverse-finance/inverse-finance/products/firm.md) - Borrow DOLA against crypto collateral
* Stake in sDOLA - Earn yield on DOLA holdings
* [Buy and Stake INV](/inverse-finance/inverse-finance/products/tokens/inv.md) - Earn protocol revenue share
**Want to learn more?**
* [DOLA Stablecoin](/inverse-finance/inverse-finance/products/tokens/dola.md) - Deep dive into our stablecoin
* DBR Token - Understanding borrowing rights
* Governance - How to participate in protocol decisions
**Need help?**
* Glossary - Quick reference for all terms
* FAQ - Common questions answered
* [Discord](https://discord.gg/3pTPChAU) - Ask the community
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**Remember:** DeFi carries risks. Start small with amounts you can afford to lose. Never invest money you need for living expenses.
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***
---
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