When the user deposits into a Silo they can decide where their deposit can be borrowed by other users to earn interest. Protected deposits are also called "collateral only" and other users cannot borrow them.
Silo uses the mint and burn functions to operate these underlying tokens. Meanwhile, the transfer is still available and can be used by any third-party application (MetaMask, DEX, etc...). Underlying tokens support hooks and can notify about the basic tokens operations (mint, burn, transfer) third party smart contract if those will be configured in the Silo Repository as a notification receiver for the Silo where operation occurs.
For better understanding, see basic Silo operations with assets state visualization