To me this is equal parts magic and sorcery. At my house, someone with an iPhone tries to connect to my WiFi. I get a pop up on my own iPhone and can share my WiFi password with them automatically and they connect to my network.
Your phone knows the wifi key, theirs doesn’t. But you exist as a contact in their phone, so it uses the same technology as airdrop to contact your phone and present the question to you about sharing the pass code.
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