This review presents a synthesis of four decades of palsa studies based on field experiments and observations mainly in Fennoscandia, as well as laboratory measurements. Palsas are peat-covered mounds with a permanently frozen core; in Finnish Lapland, they range from 0.5 to 7 m in height and from 2 to 150 m in diameter. These small landforms are characteristic of the southern margin of the discontinuous permafrost zone. Palsa formation requires certain environmental conditions: long-lasting air temperature below 0°C, thin snow cover, and low summer precipitation. The development and persistence of their frozen core is sensitive to the physical properties of peat. The thermal conductivity of wet and frozen peat is high, and it decreases significantly as the peat dries and thaws. This affects the development of the active layer and makes its response to climate change complex. The insulating properties of dry peat during hot and dry summers moderate the thawing of the active layer on palsas. In contrast, humid and wet weather during the summer causes deep thawing and may destroy the frozen core of palsas. Ice layers in palsas have previously been interpreted as ice segregation features but because peat is not frost-susceptible, the ice layers are now reinterpreted as resulting from ice growth at the base of a frozen core that is effectively floating in a mire.