I could be wrong but I think the device is just loaded with some preconfigured 'macros' that you can activate depending on the situation or game you are playing, so its like it is sending a series of inputs to the Switch as if you were pressing all the buttons yourself (like remapping all your actions to a single button or something). Not sure how complex the macros it comes with are or if you can make your own.
Calling it 'cheating' can be a stretch, pretty much all the gaming keyboard/mouse brands have some sort of software that you can use to make these type of stuff yourself, like say
https://www.razer.com/synapse-3 also some games have this ability already build-in albeit with some restrictions.
The Switch Up thing seems to be doing this at the hardware level if you can even say that because at the end of the day I'm sure it is just running a build in macro software and you need to have the dongle because you can't just install their macro software in any Switch but at the same time I assume that with an hacked Switch someone could make a homebrew with this exact same function like the situation that we had with the MissionControl homebrew that eliminated the need of having a dongle to play with 3rd party controllers.
I'm also not sure on this, but if Nintendo puts the effort into it, I think they can flag suspicious accounts for using this device depending on how well the 'macros' are made because unless the macros themselves are using sort of a random input pattern they are sending all your actions to the Switch at the exact same time intervals. Of course that is assuming Nintendo can log this stuff for analysis or send the telemetry back when you are playing offline.
Btw I know that there is also alternatives to the Switch Up dongle, like this adapter for the Pro controller
https://www.play-asia.com/cybercontroller-macro-adapter-for-nintendo-switch/13/70dk4p which let you record all your actions with a press of a button as shown here youtu.be/2m9MsB_9JOQ?t=276
Even controllers that already have support for this kind of stuff exist like
https://www.gulikit.com/productinfo/500631.html
Also 8bitdo has a range of controllers that support macros as well that you can configure/create with a specific software that they provide to you:
https://www.8bitdo.com/sn30-pro-plus/ &
https://www.8bitdo.com/pro2/
