Essentially it's plugged in and the PS3 started up. The PS3 communicates with the dongle and swaps a set of 'secure' keys to authenticate that the dongle is a legitimate, then runs some code to give you access to all sorts of options you normally wouldn't be able to see/use.
What these guys have done is found the master key found in all PS3s that allows it to authenticate any/all service dongles. Using this information one can generate their own service ID and ultimately create their own dongle.
Basically this was possible to do because the protection mechanisms in place to protect the key relied on the rest of the system not being broken. Once the system was hacked it was simply a matter of time before this was decoded as well.