Yeah, that is mostly an implementation detail and I will send you to the module system source code if you want to learn more. I can only describe what it seems to do on the outside as I have not actually needed to dig any deeper than the stuff I linked.
The module system, roughly, collects all modules, starting with the module inside the <nixos-config> file (usually configuration.nix) and the default modules from module-list.nix, and then adding stuff listed in their imports, recursively. Then paths in imports are imported. Next, if a collected module is a function expression, it gets passed lib, config, options and pkgs as arguments (the latter through internal _module.args.pkgs option), plus whatever is passed to specialArgs or extraArgs (when calling eval-config manually, e.g. using lib.nixosSystem in a flake, but that is discouraged). Then all the resulting attribute sets (mainly containing options, config attributes) are merged resulting in a single big attribute set.
(By the steps described, I do not mean neatly delineated phases but rather climbing up the function call stack.)