How exactly does this string pattern "($%b{})" work?

I am working on a library extension module, and a function I really wanted was a function that interpolates variables into a string with JavaScript's syntax `${variable}`.

I used interp from http://lua-users.org/wiki/StringInterpolation, and customised it a bit to fit my coding style:

interpolate = function(s, vars)
    return (s:gsub("($%b{})", function(var)
        return vars[var:sub(3, -2)] or error(string.format("%s not defined", var:sub(3, -2)))
    end
end

But I'm not too sure how it works.

Here are my questions:

• Why does $ not precede a % sign if it's a special character? Doesn't it anchor a pattern to the end of a string?

• What is the difference in using parentheses directly without "%b"?