When you create a new library the software will automatically create the file based database (SQLite) for you.
The file based database (SQLite) in not really meant to be used on a server. It can work, but there are some drawbacks. If you run into issues, please consider moving to a Postgres database instead.
Select the file base database and define the file location. Make sure to include the file name and the correct file extension (.db)
Learn here how to convert you file based database (SQLite) a Postgres database.