It kinda like building credit based on current coins. This allows for many tokens to be minted even more that current supply. A key example would be Dai,
Cdai-Dai minted on Compound is created by colleteral loans on compound.
https://www.coindesk.com/there-are-more-dai-on-compound-now-than-there-are-dai-in-the-world
From Twitter(most Crypto talk is there check it out): is saying that one price action of any of the other coins will prevent much brink the system. Lenders should be ok but borrowers can be screwed.
I 100% bet that fractional reserve banking is coming soon to DeFi-the reason?
It the most proven way to earn and use assets. Sure maybe this time it be on the blockchain and be more easier to see. DAO might make it better(though DAO are just like shares in the company.....)
The question will then be how will fractional reserve system be implemented? DeFi is supposed to be pseudo-anonymous and permissionless. I think a fractional reserve system will make very fragile.
Aave is creating a credit based loan service. Just a couple hours after this post. I telling you it's coming soon :P
I also read that news. It is rather interesting