Passkeys are based on the FIDO2 standard (“Fast IDentity Online”) and completely replace the traditional password.
In contrast to conventional multi-factor authentication (MFA), passkeys are phishing-resistant because no password or code is transmitted. Instead, a public and a private cryptographic key are used – the private key remains securely on the user’s device (e.g. smartphone or laptop).

Microsoft integrates Passkeys directly into Entra ID (formerly Azure AD) and thus enables login via Face ID, fingerprint or device PIN – securely, quickly and without a password.

Info from FIDO Allicance about this: Passkeys