Traditional:
Cold water enters the top of the heater into heating coils and tank where it's circulated until it reaches the temperature you assigned it on the thermostat. It's held under pressure there at the same pressure as the cold water line. Leaves the heater when you turn on a hot water faucet and what leaves is replaced and heated by the same process. Fairly simple.
Tankless, or 'on-demand' just heats the water as you use it, rather than keeping a volume of water at a stable temperature.
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