Pools instead of loan officers
An on-chain money market collects deposits from lenders into a pool. Borrowers draw from the pool after posting collateral worth more than the loan. A smart contract keeps the books: who supplied what, who owes what, and the interest accruing every block.
The interest rate moves with demand. When most of the pool is lent out, borrowing gets more expensive and supplying pays more, which draws new deposits and discourages new loans.
Collateral and health
Each loan has a health figure: the value of the collateral, discounted for risk, divided by the debt. Above one the loan is safe. If prices move and the figure falls below one, anyone may repay part of the debt and receive the collateral at a small discount. That process, liquidation, is what keeps lenders whole.
Tokenized assets such as stock tokens can serve as collateral once there is a reliable price for them, which is the job of an oracle.