It is end-to-end encryption, where each device's key generation is handled by your phone's Secure Enclave.
This article is a decent starting point in terms of what Advanced Data Protection is:
https://support.apple.com/en-us/102651
If you want a deeper dive into the security engineering of iCloud Keychain, the second half of this Blackhat talk by Apple's head of Security Engineering & Architecture (SEAR) is really great:
Synchronizing secrets: https://youtu.be/BLGFriOKz6U?si=cY94TYo28bRj4G7y&t=1357