Fractional Reserve Protocol refers to a method where financial entities, such as banks or decentralized finance (DeFi) platforms, only keep a fraction of their deposits in reserve. The rest can be used for loans, investments, or other purposes. This approach allows these institutions to create more liquidity in the system, enabling users to access more funds than what is physically held. In a traditional setting, this can amplify risks if too many clients withdraw funds at once, but in a decentralized environment, smart contracts help manage these risks through transparency and automation.In the context of DeFi, this protocol is often implemented by lending platforms that allow users to deposit assets while borrowing against them. The system must maintain a balance to ensure that withdrawals can be processed and that loans are repaid.The Fractional Reserve Protocol promotes greater capital efficiency by allowing more assets to be in circulation. However, it also requires careful management to mitigate potential issues related to liquidity and solvency.