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Inverse Finance

Inverse Finance is a (DAO) that develops and manages a suite of permissionless and decentralized financial products using technology. Originally founded by Nour Haridy in late 2020, the protocol is governed by Inverse Finance DAO, a collective of crypto enthusiasts and INV tokens. Their code base is open source and maintained by the community. [1]

Overview

Inverse Finance's main products are:

  • DOLA - a stablecoin pegged to the US Dollar
  • FiRM - a fixed-rate lending market
  • DBR - a new DeFi primitive that enables holders to service DOLA loans on FiRM. [1]

In March 2023, Inverse Finance was selected as a launch partner for Satin Exchange, a decentralized platform and automated market maker launched on the network. As part of this partnership, Inverse received an expiring veNFT, signifying a 1% stake in the initial token supply of $SATIN. [10]

In May 2023, FiRM underwent a security audit carried out by Nomoi, an independent auditing firm. The assessment extended for a week, focusing on evaluating the security of FiRM's smart contracts, the quality of its code, and the overall functionality of the platform. The objective of this audit was to ensure the security and code quality of FiRM's smart contracts while verifying the proper functioning of the platform. [11]

Products

INV Token

INV holders have voting power in Inverse DAO governance with 1 INV = 1 vote. Holders can also and are advised to stake their INV on . Staking INV as xINV entitles the holder to xINV staking rewards in the form of additional INV tokens and ensures protection against dilution via supply expansions.[1]

FiRM

FiRM is Inverse Finance’s Fixed Rate Market lending protocol that implements a new DeFi primitive called DOLA Borrowing Rights which lets the user plan a fixed rate for the loan. A novel money market architecture, Personal Collateral Escrows, lets users maintain voting rights on their tokens and it ensures that tokens from different users are not commingled. [3]

Launch of cvxFXS Market

In July 2023, Inverse Finance announced the launch of the new cvxFXS market on FiRM. The new cvxFXS market allows holders to use their FXS assets as collateral for liquidity without having to lock them as veFXS, which is not tradable and cannot be used as loan collateral. Additionally, cvxFXS deposited on FiRM still earns cvxFXS staking rewards, which are currently at a rate of over 9% APY. [12]

cvxFXS is a token that generates yield when users stake and lock FXS tokens on . [12]

DOLA Token

DOLA is a synthetic pegged to the US Dollar. It is designed to be valued as close to $1 as possible with minimal volatility. DOLA is debt-backed rather than algorithmic, meaning that DOLA is backed by retractable debt. DOLA was initially launched on but can also be found on , , , and chains. [14][15]

DOLA was introduced into supply by "Fed" which and DOLA directly to the supply side of lending markets or to Fed-enabled liquidity pools (e.g. DOLAFraxBP on ) in response to market demand. If DOLA demand decreases, they retract and burn DOLA from the supply. This includes FiRM and any lending market officially partnered with Inverse Finance. [14]

There is no interest in FiRM, borrowers instead service their loans by holding DBR in their wallets. The size of the loan determines how long the DBR lasts and one DBR lets users borrow one DOLA for one year. It is recommended to use a DEX aggregator when checking DOLA's peg.[15]

In September 2023, DOLA went live on . To facilitate the bridging of DOLA to Base, a native Base bridge was utilized. Initially, a custom user interface (UI) provided by Inverse was used for this purpose. This custom is in place until additional third-party tokens are incorporated into the official Base bridge user interface. [13]

DBR

DBR (DOLA Borrowing Rights) is an token that provides the holder the right to borrow DOLA in FiRM. A user with a single DBR has the right to borrow one DOLA for up to one year with no interest. [1]

DBRs solve issues of highly volatile interest rates in traditional variable rate lending and DBR removes many of the constraints of conventional fixed-rate interest lending in DeFi. The introduction of DBRs provides for a broader set of use cases for DOLA loans than is typically possible or practical with variable-rate loans.[1]

The Feds

The Fed smart contracts are made to expand and contract DOLA supply and provide benefits for DOLA peg management and treasury operations. They are controlled by Inverse Finance governance and they are a powerful tool for DOLA peg management. There are three different types of Fed contracts but all of them have the ability to expand DOLA supply by and supplying DOLA directly to the connected or lending market. A contraction withdraws and burns DOLA from the circulating supply. When the demand for DOLA decreases, the Fed Chair contracts the DOLA supply, reducing the DOLA overweight in the pool in order to bring the price peg back to par. [4]

Simply put, the goal is to find equilibrium for DOLA:

  • Demand for DOLA increases = AMM Fed increases DOLA supply to match this.
  • Demand for DOLA decreases = AMM Fed decreases DOLA supply to match this.

This is a mechanism for peg management that gives Inverse Finance the ability to scale DOLA supply up or down in each individual liquidity pool, ensuring a more stable peg even in times of high volatility. [4]

While DOLA is deposited in the , the Fed earns any and rewards sent to which in turn are sent back to the DAO Treasury. The current policy is to recycle a significant amount of these rewards back into “bribes” to the liquidity pool, subsidizing the liquidity expense of the DAO which otherwise would be paid in INV.[3]

DAO Community

The Community Working Group was formed in March 2022 and is responsible for assisting with community activities relevant to INV holders and contributors working for the DAO, maintenance of Docs and educational material onboarding, and acting as a governance steward. The DAO's main arena for conversation is Discord but one can find proposals on the forum a minimum of 24 hours before they go up for vote. INV holders are given multiple ways to communicate and stay up to speed on governance activities through weekly community calls, an active Twitter account, and newsletters. [1]

Security

Inverse Finance has undergone multiple audits as part of a newly enacted smart contract review process. Further information on risk prevention can be found in the RWG Gitbook.[3] In 2023, Inverse Finance received a score of 87, a 58-point improvement from the previous PQR conducted in 2021.[4]

Risk Working Group

The RWG was formed to support all functions of Inverse Finance such as DOLA expansion, providing sound risk analysis, risk management, ongoing risk monitoring for existing products, and supporting the efforts of the other working groups.[5]

Bug Bounties

Inverse Finance Sec-Ops Team has set up a 20,000 DOLA Bug Bounty vault on Hats.Finance. Users could report bugs anonymously through Hats to be reviewed by the Inverse committee. In addition, Inverse Finance hosted a 5-day open bug bounty contest on the Code4rena platform, which ran between October 25-30, 2022, to conduct a comprehensive audit of FiRM. The contest saw $50,000 in rewards and 198 white-hat researchers taking part, the highest-ever participation recorded at the time. [5]

Inverse Finance also hired DeFiMoon to perform audits on fed contracts during 2022.[5]

Incidents

The now deprecated lending market was exposed to two price manipulation exploits of the INV token in 2022 resulting in a loss of 8.8 million DOLA, 1,588 , 94 , and 39 YFI.[7] Inverse Finance promptly formed the Risk Working Group and the DAO made significant changes to its security posture.

The Treasury Working Group has made near-weekly payments to reduce the DOLA bad debt and DWF Labs entered an agreement to purchase $1MM in INV tokens at a 15% discount, all of which were used to pay down the DOLA debt in Frontier.

Inverse Finance has created two smart contracts to assist affected users. The Debt Converter lets users convert their stuck collateral denominated in YFI/ETH/wBTC to be DOLA denominated instead. The Debt Repayer lets affected users pull their money out before others if they’re willing to take a haircut in doing so.

In 2023, Inverse Finance received a score of 87 in DeFiSafety's Process Quality Review, a 58-point improvement from the previous PQR conducted in 2021.[4]

The Risk Working Group has been actively engaged in identifying and managing risks associated with the protocol, and Inverse Finance has implemented a range of risk management strategies to reduce the likelihood and impact of these risks. The report also noted that Inverse Finance has engaged with external auditors to conduct code reviews and security assessments, which is a positive sign of the team's commitment to security and transparency.[9]

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Inverse Finance

Commit Info

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Edited On

September 5, 2023

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