How does the editor pane work?

Can anyone explain to me how the editor works? I have taken a look at sourcecode to figure it out by myself, but i still don't understand how it is done.
The editor seems to be a html document inside of an iframe, but it behaves like a textarea. There is a nice blinking caret and you can insert text into the html page...
It is not possible to edit a html page inside a browser, but it is also not possible to display formatted text inside a textarea.What's the trick?
Can anyone help pleas?