We pull out the impressive-for-a-smoke-detector main board, and the optical smoke detector is front and center, safely under its baffled shield.
As smoke enters the baffled chamber above the sensor, infrared light from the LED is scattered and reflected down into the photodiode, triggering the alarm. This sort of arrangement is standard practice for smoke detectors.
But applying the Nest Labs touch means adding all sorts of extra features for handling the alarm, like sending a notification to your smartphone that your house is on fire. Neat.