In more detail
The image is divided into a grid of square blocks, and every pixel in a block is replaced by the block's average colour. Larger blocks hide more detail. The same blocky look appears unintentionally when a small image is enlarged with nearest-neighbour scaling, and deliberately in pixel art.
Why it matters
It is popular for hiding faces, number plates or text, but pixelation and blur can sometimes be partly reversed. For text in a known font, software can render candidate words, pixelate them the same way and compare the blocks until one matches, and this has recovered pixelated passwords from screenshots. To redact something properly, cover it with a solid opaque box, flatten the image and check that the original is not kept in a layer or in Metadata such as an embedded thumbnail.
Example
Pixelating an 800 × 600 image with 20-pixel blocks gives a 40 × 30 grid of 1,200 blocks; each block's 400 pixels are replaced by their average colour. At that block size a face becomes unrecognisable, but a single line of large text may still be guessable.
Common confusion
Deliberate pixelation is different from a low Resolution and PPI, although enlarging a small image produces a similar look.