This technology compresses voice, converts it to a codec, transmit it to the other end and decompress it. It utilizes internet to transmit or carry the calls which makes VOIP cheaper than the traditional land line calls.
The VOIP technology also uses softphones, IP gateways, IP Phones at the endpoint which acts like a phone to receive or make phone calls.
Below is the diagram of VOIP to let you understand how it works:
