The concept is derived out of Google Glass that works without the eyewear. The early testers describe that the app picks up a person's location via GPS and uses Street View data to zero in on the user's exact location.
Once the location is identified, it displays big, animated arrows and directions on the screen making it look like actual directions are drawn onto the real world.
The feature has not been designed to be used as the primary method of navigation. It doesn't allow you to use the camera consistently and is more for user-experience, for moments when you don't know where you head first after getting off the subway.
Google will roll out the feature to a few Local Guides before introducing it to the masses.