Basically the game has internal math which ts uses to decide what should spawn where. If you are a Level 16 character, and you are in a "hard" zone, the game will spawn enemies scaled to Level 21 say, which is PlayerLevel+5.
What this mod is doing is rather than just making you take more damage and deal less, it's changing the math used to generate opponents. So when you turn up the difficulty in vanilla, you still get a Level 21 enemy in that situation, it just does way more damage and takes less. With this mod, all the damage values stay the same, but the enemy would spawn at say Level 25 (PlayerLevel+10), and thus be a tougher opponent without just making you hit them 10 times as much to kill them.
The idea with this mod is that you can set exactly how you want things to scale. You can set it so that no enemies can spawn above your level, or that none can spawn below your level. You can even set it so that "hard" areas spawn weak (low level) enemies and "easy" areas spawn the nastiest stuff they can.
The idea is to make the game easier or harder by spawning opponents who are actually easier or harder to fight, not just making the damage ratios increasingly unfair, although this mod also allows you to do that.
