I understand encryption in mediums outside digital stuff like letters or Morse code, but how does a computer OS works when its code is scrambled, and how is the key stored and used to verify the enryption passphrase without some pluck it out and use it.
Encrypted letters don’t have to carry the key or verify it.
Encryption, in regards to computers, is a massive topic so I’ll take two individual examples:
A file/disk is encrypted and the user wants to access it - Because the file is encrypted, the OS by itself, cannot open it and display the contents unencrypted. A software utility will challenge the user for the password, passphrase, or key. That will be stored in RAM in the computer (were the contents disappear when the computer is turned off). The decryption is done, and usually the utility discards the key. Another way this can be done is if the key is already stored elsewhere in the computer box. Such as an additional tiny computer called TPM (Trusted Platform Module). These have very little computing power, but the main computer can ask for the TPM to decrypt something so the main computer never knows the key.
You want to decrypt the contents of a secure website being served to you. This is an example of asymmetric cryptography. There is one key that can encrypt and decrypt contents. This is called a Private Key. There is another key that can only decrypt those same contents. This is called a Public Key. The web site operator will use their private key (in an SSL cert) to encrypt the website contents. When your computer downloads the encrypted contents, theres a note telling where the computer can retrieve the Public Key. Your compute downloads the Public Key, and decrypts the website.