With a combination of hardware and software, the Dynamic Island can morph into different shapes and sizes for things such as incoming phone calls, alerts, notifications, Face ID authentication, timers, turn-by-turn navigation, and more. The pill-shaped cutout takes up less space than the traditional notch did on the iPhone 13 Pro models.
https://www.macrumors.com/2022/09/07/iphone-14-pro-dynamic-island-notch/