ChatGPT doesn't truly "understand" language the way humans do, but it models language in a highly advanced way by training & learning from a vast amounts of data. The key tech behind ChatGPT's ability to grasp meaning is their transformer architecture (self-attention mechanism). It allows the model to weigh and focus on different words in a sentence based on their importance or context. In simpler terms, it looks at how each word relates to every other word in the sentence and beyond. This allows it to understand context and nuances, even within long or abstract sentences.
Furthermore, ChatGPT (and other LLMs) is trained on a massive corpus of text, books, articles, websites, etc. From that training, the model learns patterns in how words, phrases, and sentences related to one another. It doesn't explicitly understand what a "dog" or "love" means in the human sense, but it understands it patterns about how they are expressed and used in language.
Without going into too much details, it also uses other techniques like Probabilistic Modeling and Semantic Representations to essentially be able to provide you with what it does currently.
If you wish to dive deeper and do some research, I'd recommend checking out the following:
1. Transformer Architecture
2. Self-Attention Mechanism
3. Pre-trained language models
4. Embeddings and Semantic Space
5. Attention is All You Need - which is a paper published by Vaswani et al., very interesting publication that is a key for understanding the self-attention mechanism and how it powers modern NLP models like GPT.
6. Contextual Language Models
I think those 6 would cover up all your questions and doubts