It works because Difference mode shows how far each pixel is from the 50% gray reference. Pixels that are closest to neutral mid-gray become the darkest in the Difference result. When you add a Threshold adjustment and move it until only a few black pixels remain, you are isolating the pixels whose RGB values are nearest to that gray reference.

Marking one of those pixels and sampling it with the gray eyedropper in Curves tells Photoshop: “make this point neutral.” That shifts the color balance so that pixel has equalized color channels, which often corrects overall white balance well.

A simple way to visualize it is to try the process on a black-to-white gradient: the area nearest 50% gray is what survives as the darkest point in the Difference view.

Where it can fail: if the image has no truly neutral subject, if the detected point is only accidentally near gray, or if the best white balance should be based on a different tonal area. In those cases, it may produce a technically neutral result that is not the most pleasing or accurate for the scene.