From the build notes:
Theory of operation:
The Propeller measures the R/C time constant determined by the resistor (internal on the Quickstart) and the capacitance on the connection point. When you bring your finger close to the connection point (the banana), the capacitance increases and therefore the R/C time constant increases.
The circuit is called: R/C Decay.
Resistor / Capacitor discharge circuits are an easy way to read resistive & capacitive sensors.
Here’s how the circuit works; flip the propeller pin to an output to charge up the capacitor. Then flip it to an input and count how long it takes for the capacitor to discharge. The time it takes to discharge is relates to the position of the potentiometer.
For full documentation on how to build one of these for yourself, check out Gadget Gangster.