How to create a stable coin.

I have some experience with working on smart contracts, but I am still confused on how stable coins work. I looked at the code for tether smart contract and had some questions. Firstly, do stable coins use the erc20 contract but just modify it? Secondly, how does the contract know how much of a coin to give. For example say the US dollar drops to 96 cents will the contract adjust for that? I am still trying to learn so any help would be greatly appreciated.