> I never understood that concept.

No problem! It certainly doesn't make sense if one approaches it from a Western Christian mindset. I am not trying to imply that is how you are approaching it, rather I mention this because Judaism often gets compared to Christianity, but I think they are quite different.

It is better to think of Judaism as a tribe. Membership to this tribe is mainly given under two conditions: through matrilineal descent or through religious conversion. Some subgroups within the tribe have different membership conditions like recognizing patrilineal descent, others may not recognize conversions done by other subgroups.

Exactly this. It's a cultural thing, much like how you can be an American or a German or an African. There's no single ethnicity for any of those, but they're all cultural identities based on birth or citizenship.