In plain words
Under the hood it is a vector index — the technology behind modern search — but the practical version is simpler: the index stores what your documents mean, not just what they say. Searching for "the harbour confrontation" can find the scene where the fight at the docks happens, even if neither the word "harbour" nor "confrontation" appears in it.
Because the index is project-scoped, the same word in two projects never crosses streams: your pirate novel's "anchor" and your memoir's "anchor" live in different worlds, exactly like they should.
In local words
The index lives next to the project, in the same folder you can back up and move. Indexing runs on your machine — no account, no upload, no "processing may take up to 30 days". Delete a document and its indexed traces go with it.
When you do connect a cloud AI, the chat can use the index to ground its answers in your sources — the retrieval happens locally, and what gets sent is the passage it found, under the provider settings you chose. That choice is always yours, and off is a valid setting.