In a world where Bitcoin is the only currency - why would anyone in their right mind lend any of it to anyone? It seems in the final analysis impossible to take a loan with a positive interest in Bitcoin since the supply is capped - it just can't work for everyone all the time. Is it somehow supposed to be mitigated by defaults? How would capital allocation on just Bitcoin work?

I nearly agree and I've said this publicly a few times. I think almost all finance will be equity or equity-based but I do think there will still be corner cases where debt is more desirable. some reasons why might include: the ability to prepossess and overcollateralize or, my personal favourite, the admin nightmare of facilitating working capital finance with equity as opposed to matching extremely low risk positive and negative floats.