How do stablecoins work? 

To understand how stablecoins work, you must understand the sole mission towards which they thrive, and that is price stability under all market conditions. That’s a tough job in a bear market as the assets or investors backing the stablecoins significantly fall in bearish market sentiments. But this is just the tip of the iceberg, things are a little more complex than just reserves of assets and market conditions. 

Almost all stablecoins try to maintain a value of $1 at all times. For each stablecoin, a similar net worth of asset has to back it, ideally 1 US dollar, which allows users to exchange stablecoins for their pegged value at a 1:1 ratio. 

Stablecoins can be backed by fiat currencies like the dollar or euro, or like Maker Protocol’s Dai token, they can be backed by cryptocurrencies, which require users to stake their crypto in smart contracts. Dai is collateralized by mainly using ETH to buy the dollar-equivalent amount of DAI on an exchange or staking ETH into Maker Protocol smart contracts and being issued with DAI in exchange. The Maker protocol adjusts the collateral ratio in the smart contracts as per market demand and tracks the value of the US dollar at almost 1:1.