Instead of a bank account, the backing is a vault: you lock volatile collateral and mint stablecoins worth less than it. The buffer absorbs price falls, and if it erodes past a threshold the position is closed by an on-chain-liquidation.
The advantage is verifiability. Anyone can read the contracts and count the collateral, so there is no trust in an issuer's accountant. The cost is capital efficiency: locking $150 to mint $100 is expensive, and the system's solvency depends on oracle prices being right and liquidators showing up during a crash.
Stress arrives all at once. A fast drawdown can push thousands of vaults under water in the same block, and if liquidators cannot clear them at a profit the protocol ends up with bad-debt and the token can depeg. Chains congesting at exactly that moment has happened before.
Related: stablecoin, collateral-factor, on-chain-liquidation, bad-debt