The protocol allows liquidity providers to delegate collateral to liquidity pools. They can then take out a loan of snxUSD stablecoins. This mechanism is similar to other DeFi protocols which implement collateralized debt positions, such as Liquity.
Unique to Synthetix is the ability for liquidity pool managers to configure these pools to extend credit to derivatives markets. These markets generally rely on decentralized oracle networks (such as Chainlink and Pyth) to retrieve the price of off-chain assets and issue on-chain derivatives of these assets. Analogous to Uniswap, in exchange for extending credit to markets (allowing them to always fill orders for traders), markets can collect and deposit fees. This creates an incentive for liquidity providers by reducing the debt of their positions.