The more detailed, and technical version of @Buscar웃's answer, from Apples iOS Security Guide (2018) Page 40, bolded by me:
iOS devices that support AirDrop use Bluetooth Low Energy (BLE) and
Apple-created peer-to-peer Wi-Fi technology to send files and
information to nearby devices, including AirDrop-capable Mac computers
running OS X 10.11 or later. The Wi-Fi radio is used to communicate
directly between devices without using any Internet connection or
Wi-Fi Access Point. When a user enables AirDrop, a 2048-bit RSA
identity is stored on the device. Additionally, an AirDrop identity
hash is created based on the email addresses and phone numbers
associated with the user’s Apple ID.
When a user chooses AirDrop as the method for sharing an item, the
device emits an AirDrop signal over Bluetooth Low Energy. Other
devices that are awake, in close proximity, and have AirDrop turned on
detect the signal and respond with a shortened version of their
owner’s identity hash.
AirDrop is set to share with Contacts Only by default. Users can also
choose to use AirDrop to share with everyone, or turn off the feature
entirely. In Contacts Only mode, the received identity hashes are
compared with hashes of people in the initiator’s Contacts app. If a
match is found, the sending device creates a peer-to-peer Wi-Fi
network and advertises an AirDrop connection using Bonjour. Using this
connection, the receiving devices send their full identity hashes to
the initiator. If the full hash still matches Contacts, the
recipient’s first name and photo (if present in Contacts) are
displayed in the AirDrop share sheet.
When using AirDrop, the sending user selects who they want to share
with. The sending device initiates an encrypted (TLS) connection with
the receiving device, which exchanges their iCloud identity
certificates. The identity in the certificates is verified against
each user’s Contacts app. Then the receiving user is asked to accept
the incoming transfer from the identified person or device. If
multiple recipients have been selected, this process is repeated for
In the Everyone mode, the same process is used but if a match in
Contacts isn’t found, the receiving devices are shown in the AirDrop
send sheet with a silhouette with the device’s name, as defined in
Settings > General > About > Name.
Organizations can restrict the use of AirDrop for devices or apps
being managed by using an MDM solution.