I am a little overwhelmed with this site so if I have posted this wrong please point the way.

Q.  I just got the Air 2 and activated the Aircraft in Area warning toggle in the controler.  From whence does that warning come? Is it a creature of GPS?  Magic? WiFi that I don't know about.  So far it has cued me to an ultralight in my airspace.  How?

Hi there. Thank you for reaching out and we're sorry for the trouble. Can you please confirm if you are referring to an error message on the application? If yes, can you please provide us a screenshot for us to further isolate the issue? Please keep us posted. Thank you.

DJI Paladin Posted at 10-3 03:56
Hi there. Thank you for reaching out and we're sorry for the trouble. Can you please confirm if you are referring to an error message on the application? If yes, can you please provide us a screenshot for us to further isolate the issue? Please keep us posted. Thank you.

This is NOT a problem.  There is a feature on the fly app for the Air 2 that allows for a warning if aircraft are nearby.
It's not an error message on the application, it is built into the app.  My question is this:

How does this work?  From where does this application get the information that there is a plane?  I note that twice now it has told me there was traffic in my space and both times there actually was.  It's not an issue I just want  to know how it works.  

AFAIK, it is receiving ADS-B messages which are sent out by a/c transponders.
https://en.wikipedia.org/wiki/Automatic_Dependent_Surveillance%E2%80%93Broadcast
However, those types of transponders are usually found in bigger a/c as these transponders are quite pricey. I only have a regular Mode-S transponder in my C172S.
Also, they are not (yet) mandatory for small general aviation a/c (at least here in Europe). And those a/c are the ones you are more likely to have an encounter with. Except for public services helicopters (police, SAR, etc) but they do carry ADS-B transponders.
There is another system similar to ADS-B which is popular for gliders and smaller general aviation a/c: FLARM
https://en.wikipedia.org/wiki/FLARM
This would be more useful for drone-a/c collision avoidance than ADS-B. But I doubt that DJI drones are able to receive the signal.