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?
Yes, they are. You must try to read the requirements to be eligible to get loans in the crypto. You must also escrowed the collateral that if you are seeing it from the value and it must be even higher than your loan. That means when you are not paying back your loans and your collateral will be disappeared to pay your loans.
The collateral will be matched with the interest from your loan too.