Bankr is a margin lending smart contract. 'Lenders' deposit whatever they want to lend out and get a token in return. The token pays a set rate of interest. This interest rate is determined by the ratio of lenders to borrowers. When borrowers want to borrow from the contract, they put up collateral. All the funds have to be contained within the smart contract.
How does it work in practice? Say I want to leverage up on eth. I can't just deposit 1 eth and get 2 out. There's no mechanism to ensure that I pay those 2 ETH, and liquidating the 1 I put in there isn't going to do anything. But if the 2 eth I got were still kept in the smart contract, then things would be more reasonable. The moment my 1 eth collateral minus interest dropped beneath the amount needed to comfortable reimburse the borrower for those 2eth losing value, it would be liquidated and my trade closed. The lending contract interacts with the Bancor smart contract to perform token changing. That way if someone wanted to short 2 eth, they could deposit 1 eth, then make the 2 eth inside the smart contract interact with Bancor to get, say, USDT. If the 2 eth they borrowed rise in price enough that they're close to not being able to cover the interest with the 1eth collateral + USDT, they are liquidated and the trade is closed.
The interest rate would also be determined largely by arbitrage. If interest rates for the token are higher than the interest rates at the exchanges, arbitrageurs will take out loans in order to buy the tokens and capitalize on the difference in the interest they pay and the interest they receive from the tokens.
Unfortunately, I'm not going to make Bankr. But someone will.