It uses asymmetric cryptography. You sign a login request with the locally stored private key and the service verifies the signature with their stored public key. The PIN on your device is used to unlock access to the private key to sign the login request.

The passkey stored locally in some kind of hardware backed store on your device or in your password manager is the first factor: something you have.

The PIN/password or fingerprint/face to unlock the device and access the stored passkey is the second factor: something you know or something you are, respectively.

Two factors gets you to 2FA.

If you've ever used ssh it's very similar to how ssh keys work. You create a cryptographic key for the site; this is the passkey itself. When you go to "log in" the client and server exchange cryptographic challenges, which also verifies the site's identity (so you can't be phished...another site can't pretend to be your bank, and there are no credentials to steal anyway). Keys are stored locally and are generally access restricted by various methods like PIN, passphrase, security key, OTP, etc. When you're entering your PIN it's how the OS has chosen to secure the key storage. But you've also already passed one of the security hurdles just by having access to that phone/computer. It is "something you have".

As I understand it (and assuming you know what asymmetric keys are)...

It's about using public/private key pairs and swapping them in wherever you would use a password. Except, passwords are things users can actually remember in their head, and are short enough to be typed in to a UI. Asymmetric keys are neither of these things, so trying to actually implement passkeys means solving this newly-created problem of "how the hell do users manage them" and the tech world seems to be collectively failing to realize that the benefit isn't worth the cost. That last bit is subjective opinion, of course, but I've yet to see any end-users actually be enthusiastic about passkeys.

If that's still flying over your head, there's a direct real-world corollary that you're probably already familiar with, but I haven't seen mentioned yet: Chip-enabled Credit Cards. Chip cards still use symmetric cryptography, instead of asymmetric, but the "proper" implementation of passkeys, in my mind, would be basically chip cards. The card keeps your public/private key pair on it, with embedded circuitry that allows it to do encryption with the private key, without ever having to expose it. Of course, the problem would be the same as the problem with chip cards in the US, the one that quite nearly killed the existence of them: everyone that wants to support or use passkeys would then need to have a passkey reader, that you plug into when you want to login somewhere. We could probably make a lot of headway on this by just using USB, but that would make passkey cards more complicated, more expensive, and more prone to being damaged over time. Plus, that doesn't really help people wanting to login to shit with their phones.

It is 2FA. Just easier to use.