Passkeys are a cryptographic public key authentication system, similar to how SSH keys work.

Your password manager stores your passkeys. You must complete a private/public key pair challenge with the website you are trying to authenticate with in order to login using your passkey.

It changes the factor from "something you know" to "something you have".

Most password managers require biometrics (something you are), or require a master password (something you know). Once this is paired up with a passkey (something you have), it means you are using multi-factor authentication to login, which is much stronger than using just username and password.