I see your point but they are collateralized. Let's put it this way, my friend just bought his house and spent 2 weeks with mortgage agents and brokers. Meanwhile I deposit some ETH-USDC LP into maker and in 2 minutes get a no questions asked loan at 3.5%. Sure it's lower leverage when compared to most mortgages but I think my point still stands.

What happens when the price of BTC/ETH falls by 50%? I don't see how would lending at 3.5% (unless it's very short term) would make sense considering the risk.

And what happens if you can't pay back this loan? And what happens if thousands or even millions of people can't pay back their loans?

The current systems may not be perfect, but they do exist for a reason. Chesterton's Fence and all.