Help me decipher docker runner related gitlab-ci configuration

Hi, I’m new to GitLab CI and I am trying out certain things related to running builds and tests in docker images. Today I stumbled on this configuration here

  - docker:dind

 image: docker:latest
 stage: test
   - >
      docker run -t --rm 
      -v /var/run/docker.sock:/var/run/docker.sock
      -v "$(pwd)":"$(pwd)"
      -w "$(pwd)"
      -u 0:0
      gradle:3.4 ./gradlew test

I can run tests fine with this configuration however I don’t understand how this configuration is able to even run.

Up to this day I thought that whatever commands I put in the script section of docker-runner job are executed inside the container which is specified in image section of that job, in this case docker:latest. Or in case of shell runner - on the host where shell runner is registered.

Apparently this is not the case since docker:latest image does not have a running docker daemon and cannot execute docker run … command. In fact what happens is that gradle image is started in docker:dind container. How the heck script got propagated to docker:dind container which was started as a complementary container via service?