An ISO file is a complete, formatted filesystem image. All
dd does is do a bit-for-bit copy of that filesystem image to your target media.
There is no magic going on behind the scenes. The ISO filesystem preparation was done beforehand (often by a specialized tool). All
cat does is write that collection of bytes out. It doesn't interpret the
.iso at all, nor does it understand that it's trying to create a bootable removable medium at all.
It does require proper support from the kernel and device driver to make the
writes work on that media. A bit of "magic" goes on there, since writable optical media don't operate exactly the same way as conventional hard drives. But that magic doesn't involve interpreting the contents of the ISO file.
You could mount the
.iso file directly without burning it by using a loop mount (if such a thing is available on your OS). Similarly, you can create a file that contains for instance an
ext4 filesystem, and you could
cat that to a partition.