What does "erase all content and settings" do on a M1 Mac?

I think this is pretty clear....here is the relevant section from the very beginning of this Apple article:

Erase your Mac and reset it to factory settings - Apple Support

Use Erase All Content and Settings to quickly and securely erase all settings, data, and apps, while maintaining the operating system currently installed.

Then there is another section later in the article:

After your Mac restarts, a setup assistant guides you through the setup process, as if you're setting up your Mac for the first time.

This indicates that all macOS user accounts are also deleted since Setup Assistant will be run which will be just like powering on a brand new Mac. My guess is that macOS is likely being reinstalled even though that is not explicitly mentioned, but is highly implied in that article.

FYI, the data on all 2018+ Macs is hardware encrypted all the time. Even if a user later enables Filevault on a 2018+ Mac, it is only encrypting the encryption key adding another layer of protection (all depends on the quality of the passwords used for Filevault and the macOS admin user accounts). As soon as you enter a valid macOS password when authenticating to a 2018+ Mac, the hardware encrypted data on the internal SSD is unlocked.....there is no unencrypted mode for the internal SSD.

I have no idea whether you can boot from USB after erasing the internal SSD. I've never tried it...in fact I never tried it with a 2018-2020 Intel Mac with T2 security chip which already had the system security settings configured to allow booting from an external drive prior to erasing the internal SSD. If I had to guess, I would say it would not

The only way you "brick" an Apple Silicon Mac when erasing it is when you erase the whole physical internal SSD since there are some hidden Containers on the internal SSD which are necessary to access recovery mode (or One True Recovery as I've seen it called and abbreviated as 1TR). If you want to erase the SSD for an Apple Silicon Mac, you need to follow the instructions in this Apple article:

Use Disk Utility to erase a Mac with Apple silicon - Apple Support

That article mentions two methods.

There is actually a third method which involves a firmware "Restore" which requires access to another Mac running macOS 12.4+ which is the only way to complete reset the internal SSD with a fresh partition table & file system.

Revive or restore a Mac with Apple silicon using Apple Configurator - Apple Support

jrmyeh wrote:

The "Use Disk Utility" link you gave is known to me. That page takes you down the "erase all content and settings" path for the most current OS's, and away from using DU.

That article may have the first option as "erase all content and settings", but it also mentions how to use Disk Utility to erase the disk which will work perfectly fine for all current Intel & Apple Silicon Macs. That is why I posted the article.