It works by considering only the digital pen signal for writing. The pen in the demo is essentially the same as the iPen, which has been supported by a few handwriting apps (including mine) on the market. However, the pen is not accurate enough for serious note-taking, because the signal is transmitted some distance above the pen tip. There are many complaints in the iPen Kickstarter comment section.

iPen: http://www.kickstarter.com/projects/ipen/ipen-the-first-acti...

(Disclaimer: I am the developer of GoodNotes.)

I've tried it. The pen was accurate enough for me to color in tiny squares (same as those on grid paper). Writing felt natural too - I was surprised.