New units of stablecoins are being created out of thin air, but the catch is that they can only be used on the exchange (technically, it could be spent else where if other contracts wanted to use it), and if there is a shortage of actual stablecoins when someone tries to withdraw their credit balance, they will receive debt tokens that are redeemable from the exchange for stablecoins at an interest (collateral requirements will be raised for all actors if credit balance > stablecoin balance, and lowered when the opposite is the case).
> What do you mean by 'borrow collateral into existence'?
In this case, in order for the credit balance for an address to increase typically, a user will need to deposit stablecoins into the exchange and their credit balance gets incremented by the same amount (their credit balance is used to buy derivatives).
However, in the case where a liquidity pool is borrowing from the exchange, the credit balance is increased for the liquidity pool without stablecoins being deposited by the pool (typically a pool will need to have stablecoins deposited into it by liquidity providers in order for the credit balance of the pool to increase, the credit balance of the pool is used as collateral write/buy derivatives).