What is Inverse Finance?

The Inverse Finance project is a Decentralized Autonomous Organization (DAO) comprised of developers and designers who develop and manage the Fixed Rate Market (FiRM) protocol.

The FiRM, the core of the Inverse Finance project, is a new system for borrowing and lending cryptocurrencies. It solves the problem of variable, volatile interest rates attached to decentralized borrowing protocols.

Using its debt-backed, decentralized stablecoin, DOLA, and the yield-bearing version of DOLA, sDOLA, the FiRM protocol offers a fixed lending rate. To fully operate, the Inverse Finance project consists of liquidity pools, the FiRM protocol, and personal collateral escrow.

Added to the possibility of a fixed interest rate, the Inverse protocol allows users to sell or transfer their right to borrow to other users. This gives users optionality, turning the right to borrow into a speculative investment.

History of Inverse Finance

The Inverse Finance DAO was launched on the Ethereum blockchain in 2020 by Nour Haridy. The project was designed to govern itself using its governance token, INV.

On the 30th of April 2021, Inverse Finance acquired Tonic Finance for $1.6 million. Tonic Finance is a decentralized bank that issues a bank account and offers its users such features as fast payments, savings, and investments.

In April 2022, Inverse Finance was attacked by a hacker who stole $15.6 million. The attacker achieved this by targeting the Anchor money market feature on the platform. This manipulated the prices of tokens on the platform, allowing the hacker to borrow massive amounts on low collaterals.

By June of the same year, the inverse Finance platform fell victim to another hack attempt that resulted in the loss of $1.2 million. This was also done by price manipulation, resulting in a net loss of $5.83 million in stable DOLA.

In light of the attacks, the project enlisted the services of a third party that audited the project and its smart contract to mitigate future attacks.

Core components

FiRM

The desire for a fixed-rate marketplace to get loans came from the volatility of the traditional borrowing protocols in the crypto space. The FiRM protocol uses concepts like DOLA Borrowing Rights and DOLA to provide these fixed borrowing rates.

The DOLA Borrowing Right (DBR) is verifiable proof that a user can borrow a specific amount of DOLA for a particular amount of time at a specific rate. The DBR token is an ERC-20 token that allows for the borrowing of DOLA at a rate of 1:1. The token can be purchased on exchanges that support ERC tokens.

The FiRM protocol also integrates the Accelerated Leverage Engine (ALE). ALE allows Inverse Finance users to borrow against single collateral and multiply those borrowing up to 8 times their original loan amount.

Although utilizing the ALE feature comes with added risk, it is the most reliable multiplier that relies on a fixed rate. This would be useful for institutions, hedge funds, and others seeking certainty around their financing costs.

To use the FiRM and borrow DOLA tokens, the user must first deposit collateral on the platform. The collateral can be wBTC, cvxFXS, DAI, INV, wETH, and CRV, to name a few. Then, the user must acquire DOLA borrowing rights to service the debts and acquire the borrowed DOLA.

Personal Collateral Escrow

Another feature of the Inverse Finance platform is the personal collateral escrow (PCE). In DeFi protocols, user collaterals are usually pooled together in a lump sum, making it vulnerable to hack attempts and bad actors.

The PCE design comes with two advantages. The first is the ability to utilize further collateralized assets, which would have been impossible in a collateral pool. A token that gives its users voting rights cannot provide such a utility if it is muddled with other collaterals in a pool. With PCE, the user’s collateral is separated from others, so the user keeps the voting rights and other rights attached to owning those tokens.

The second advantage is security. Pooling assets into a large collateral pool makes the pool attractive to hackers hoping to get a chunk of the pool. By keeping things separate, PCE makes it less appealing for attackers because they can’t have access to a massive amount at once.

PCE also adds extra security by preventing lenders from loaning user collateral. The only token that can be borrowed on the platform is DOLA, which PCE implements, and the available DOLA is capped based on the DBR asset owned. This drastically reduces the possibility of a price oracle manipulation incident.

Liquidity Pool

A central feature of DeFi protocols is liquidity pools. Liquidity pools are digital tanks containing pairs of tokens to facilitate trading and swapping those tokens.

Liquidity pools are public pools to which any user can contribute, and they usually include a stablecoin and another more volatile currency. Liquidity pools also allow users to earn passively by getting a share of the fees through LP tokens.

The liquidity pool mechanism collects a small fee every time someone uses the pool to swap tokens. This fee gets distributed back to the pool’s liquidity providers as a reward for keeping the pool liquid.

Unfortunately, all features have a measure of risk, and so do liquidity pools. Users can also lose funds through impermanent loss, which becomes permanent when the user withdraws their tokens.

Features Of the Inverse Finance Ecosystem: Dashboard and Frontier

Dashboard

Source: Inverse Finance Website

The Inverse Finance dashboard is the primary interface for the project that gives users an overview of the activities on the platform. The dashboard displays the FiRM protocol and the annual percentage yield (APY) earned on assets deposited to the protocol.

It also displays the oracle type, capitalization fee, TVL, the total amount of DOLA borrowed by users, the current availability of DOLA for borrowing, and user assets like deposits, debts, and borrowing limits. The borrowing limit indicates the maximum amount of DOLA users can borrow based on the value of the collateral deposited on the platform.

The dashboard also shows the numerous markets or tokens that the user can borrow against. The dashboard displays the user the amount of DOLA available and their borrowing limit. It also allows them to track their transaction history, manage DOLA Borrowing Rights, Borrow DOLA assets, and participate in select markets.

Frontier

Source: Inverse Finance Website

The Frontier protocol in Inverse Finance was created after the multiple hack attempts in 2022 that led to the loss of user funds. The protocol is a means for the platform to refund users who lost funds on the project.

The Frontier protocol is designed to use anTokens to represent user funds lost in the process. It also implements two possible means of debt resolution: a debt converter and a debt repayer.

A debt converter is a tool that allows users to convert their anTokens into IOUs against the DOLA. These IOUs essentially represent a promise from Inverse Finance to repay the user in the future. The benefit of the debt converter is that users receive DOLA IOUs for the total value of their anTokens, without any upfront discounts.

The debt repayer is an option for users who mind being owed and want access to their funds immediately. It allows users to redeem their anTokens for the underlying DOLA asset at a discounted rate. The discount applied is inversely proportional to the assets recovered by Frontier and Inverse Finance. When enough debts are recovered, users can redeem their anTokens for the total value of their lost assets.

sDOLA

sDOLA is a wrapped version of the DOLA token. sDOLA can be staked to earn passive income. It is built with the ERC-4626 standard, which allows projects to tokenize vaults.

Users get sDOLA tokens by staking DOLA within a contract and minting sDOLA. Users who mint and hold sDOLA are eligible to receive DBR rewards as an incentive for staking. These rewards are automatically reinvested to generate more returns.

This process enhances the value of sDOLA relative to DOLA, meaning the amount of future DOLA rewards you can get for each sDOLA minted grows over time. This makes sDOLA an attractive option for long-term holders looking to increase their holdings through compounded earnings.

What is the INV Token?

Source: CoinMarketCap

The INV token is the governance token of the inverse Finance project. Although the project uses three main tokens for its operations, INV, DOLA, and DBR, the INV token is capable of governance and staking utilities.

It is an ERC token supported by self-custody wallets like Trust Wallet and MetaMask.

The token has a total supply of 555k INV tokens, with 510k INV tokens in circulation. 10% of the tokens are allocated to the team, 32.7% is allocated as airdrop for the community, and the remaining 57.3% is assigned to the Inverse Finance ecosystem for the running and development of the ecosystem.

Is the INV Token a Good Investment?

The INV token allows users to stake on FiRM and borrow DOLA tokens using their staked assets. INV stakers are eligible to receive two types of rewards: the DBR real yield streaming rewards and INV stakers rewards

The INV stakers rewards are sent continually to stakers with every Ethereum block mined, roughly 6,400 times daily. The aim is to ensure that INV stakers are protected from dilution and own a constantly increasing portion of the supply.

The DBR real yield streaming rewards are bonuses given to stakeholders through DBR tokens. The more users borrow DOLA using DBR tokens. The more incentives are shared with INV stakers that can be redeemed or transferred to other users.

The token also allows users to participate in governance, giving them a say in deciding the project’s direction. This would help improve the project in the long term, making it attractive to investors.

Risk Analysis

Advantages

The main advantage of the project is the fixed-rate borrowing utilizing FiRM. FiRM provides fixed-rate loans to Inverse Finance users in a space dominated by variable rates. This allows for better financial planning and reduces the cost and risk element of borrowing.

Another advantage is the security provided by the PCE. This reduces the platform’s attractiveness for attackers enticed by large pooled collateral. Finally, it pays INV stakers twice, allowing its users to earn passively while participating in governance.

Disadvantages

As a security measure, the project has limited the borrowing options to DOLA, which would not look enticing to users loyal to other currencies. The project can be too complicated for new users with its multiple tokens and decentralized nature.

Finally, as a new project that has lost substantial funds to attacks, the platform will not be attractive to conservative investors.

Challenges

The DeFi lending space is highly competitive with names like Curve Finance and Uniswap. This means that Inverse Finance needs to innovate and differentiate itself to attract and retain users.

The project also faces security strain, past reputation loss from succumbing to hack attacks, and the requirement to foster a healthy ecosystem.

Finally, the crypto space is volatile. Although the project aims to guard against volatility, it is still not immune to the volatility of the space and the uncertainty of future regulations.

Competitive analysis

The Inverse Finance and Notional Finance projects are strong contenders in the DeFi space, offering fixed rates and terms for up to a year. While they both provide fixed loans, they approach it differently.

Inverse Finance offers fixed rates through FiRM, while the Notional Finance project provides fixed terms up to one year. The Notional Finance project focuses on delivering services that cater to different financial needs. At the same time, Inverse Finance uses FiRM to provide a clear solution for users seeking fixed interest rates.

Unlike the Notional Finance project that uses leveraged V3 vault strategies to optimize yield for DeFi users, Inverse Finance chose to phase out vaults as they were deprecated.

How Can You Own INV?

Users can follow a simple process to own INV tokens and become a part of the Inverse Finance ecosystem.

Setup a Wallet

One way to own INV tokens is to purchase them through an exchange. For this, the user must create a Gate.io account, complete the KYC process, and add funds to the account to buy the token.

Utilize the INV Tokens

Once users have acquired INV tokens, they can explore the Inverse Finance ecosystem by staking INV tokens, borrowing DOLA, and participating in governance.

Take action on INV

Users can trade the INV token here.