You've hit upon the problem. All the stable coins, unless they're actually based on and backed by something other than other cryptocurrencies, are essentially fraudulent.

> I have a hard time understanding how a stablecoin could be backed by crypto.

If you had a coin backed by a basket of other cryptocurrencies, it would likely be relatively stable in that the distinct individual volatility of each of the backing coins would be mitigated. OTOH, the overall volatility of the cryptocurrency market (which often moves rapidly and in the same direction) would not, so it wouldn't be very stable.

MakerDAO has overcollaterized deposits of Ethereum backing their stablecoin Dai

You should totally watch the video above ;) In short you can earn money if you re-collateralize with crypto so if the price goes down it produces demand for that crypto to re-collateralize. Some people get liquidated of course because they are unable to throw more money in. This is the risk you take if you participate. It only makes sense to participate if you are long or if you just buy up the ones who get liquidated. For the users of the stablecoin however this is totally irrelevant they want to avoid the volatility by using stablecoins. Therefore they wont profit on price gains but also wont lose on price drops. They kinda gave away that risk/opportunity. "Gave away" as in someone else has it now. And that's why it works. Someone actually will lose if the price drops. Someone has to. Unless everyone would hold enough reserves to actually cover the drop. But people are greedy and will risk more than they can cover. To good part is that they should lose before they can harm the system. Its basically like with trading where the exchange will liquidate your position before you actually go below zero.