Yes, you are right, it is hard to explain...
ALL gets sold to RUNE.
50% of that RUNE goes to the borrower (and can be swapped for whatever asset you want to borrow, the other 50% effectively goes into the LP via synthetic asset purchase (in the case of a BTC loan it would go into synthetic BTC which effectively is a position in the RUNE:BTC pool). That is my understanding of the system.
Yeah I still need to research synthetics that topic just keeps popping up.
It is pretty much an acocunting device for things like lending. Synthetic BTC is kind of like an IOU that is accounted for in the LP. So 1 synth BTC would end up being 50% RUNE and 50% BTC at all times.
The risk of synths is the same as the risk of lending itself. The protocol guarantees the syth at 1:1. So a me holding 1 synth BTC is as good as holding 1 BTC as long as THORChain is solvent / trustworthy etc. The protocol risk is the only risk. It can get way more complex than that... I haven't dove any deeper but I do know that liquidity providers bare some of the risk from derived synthetics.