The computer's USB port powers an STM microchip that has a couple pins connected to the computer's USB data lines. Passwords are stored in the STM, AES256 encrypted and typically go back to the computer by the device acting as a USB keyboard (though there's also a way to copy to the clipboard or just view them).

To get them out, you need the device password (to do the AES decryption) and physically press a button on the device (to ensure a compromised computer can't just obtain all your passwords without your cooperation). Doesn't have to store passwords, could be your credit card numberes, seed phrases, bookmarks, address book, or whatever. As long as it is small, it'll work.