How does drive droid work?

There is a dedicated thread on XDA forum about this application

DriveDroid allows you to boot your PC from ISO/IMG files stored on
your phone.

DriveDroid relies on the kernel of Android, in particular the USB Mass Storage (UMS) feature. It allows your phone to act as an USB-drive and have a device (SDcard) or file (ISO/IMG) be used as the content for that emulated drive.

• USB-drive and CD-drive emulation

These two modes allow your phone to act as an USB-drive or as an
CD-drive. Most devices only support USB-drive emulation. Some devices
only support CD-drive emulation.

To get both USB-drive as well as CD-drive emulation on your phone you
need a patched kernel.

With USB-drive emulation it is possible to boot IMG files and most
Linux-based ISO. It also allows you to write to the disk, which allows
you to create data-disks as well as install an OS onto the USB drive.
The downside of this mode is that some ISOs will not boot, since those
ISOs are created for CD-drives.

With CD-rom emulation it is possible to boot all CD-based ISOs. So,
having both USB-drive emulation as well as CD-rom emulation is
preferable

The functionality is such that the android device acts as an emulated drive to boot .iso files from PC.

Once installed, DriveDroid will ask you for the root access after
which you can proceed and download one of the Linux ISO images from
withing the DriveDroid app. However, if you have already downloaded
any bootable ISO image, then you can copy them to the Downloads\Images
folder on your SDCard. This is the default folder where ISO images are
kept.

After connect your Android phone to your PC and press the power button
on the PC. During the booting process, press
F12 to pull up the boot
selection menu and choose your Android device from the menu. Pretty
soon, you would be booting from the ISO image located on your Android
phone.