WP unzips the .zip file and places its contents inside of /wp-content/plugins/. From there, WP is set up to recognize plugins inside that folder with a specific comment:
<?php
/*
Plugin Name: Example Plugin
*/
The plugin can either be a single PHP file directly inside /wp-content/plugins/ or be a full subfolder such as /wp-content/plugins/example-plugin/ containing not only the main PHP plugin file but also additional required files.
Activating the plugin is a separate step – if the user has installed the plugin in wp-admin, they will see a success message once the plugin is installed with a link to activate. The plugin will also appear in the list of all plugins in wp-admin with a link to activate it there.