The Dream World is Freddy's main domain. He takes his victims to the area to both torment and kill them. In the Dream World, Freddy is powerful to the point of invincibility, and is able to withstand any injury that would normally harm or kill a normal person. He is able to manipulate his victims' dreams to whatever he sees fit, mostly in the form of his victims' personality and/or fears. Any injury that his victims sustain in the Dream World affect them in the waking world as well, and, if they die in their dreams, they are dead in reality.
Although dreamers are able to manifest their own powers in the dream world, they are rarely, if ever, close to being a match for Freddy's own power. Only Alice Johnson has shown comparable power to Freddy's in the Dream World.