Are people only trading the crypto they borrow or withdrawing and doing other things with it (possibly in the real world?)
If people are mainly just trading what they borrow, what happens if they lose all of it/a lot of it and can pay back the amount?
I doubt that people would trade with what they borrow, it is not really reasonable to assume that people would not have any money and take out loans to make trades in order to profit, that would result with horrible stuff. In defi world it is about the same, collateral is something important, lets say you take 100 dollars eth, you give 120 dollars btc for it, so if you lose all your 100 dollar eth loan, they take your 120 dollar btc and it is done.
This in fact used to happen with bitcointalk as well, there were people here on bitcointalk lending section that took collateral in forms of weird coins that worth a lot, and gave bitcoin instead, if you pay your loan back you got your collateral back, if you failed you lost more money. Never understood the idea of having money but locking it for getting loan, if I have money that means I shouldn't need loan.