You understand incorrectly. “passkey” refers to a token used for the public key authentication that is used for sign in, which needs to be stored somewhere - this can be stored in a hardware key like a YubiKey, or in your device’s credentials manager. In principle, this could be anywhere, but it needs to be somewhere secure to not be trivial to compromise (eg taking out your HDD and just copying your passkey off it)

In Windows’ case, this secure credentials store is the TPM chip, which is why you are not able to use passkeys on Windows devices that have no TPM chip (unless you use another hardware implementation).

Tldr: passkeys are data, not software, and to store the data, you need some form of hardware, which needs to be secure to not be a really bad idea.

If you’d like to do some reading before confidently correcting me further, I’d suggest reading about how passkeys work.