Traditional phone networks use circuit switching to connect calls. When you speak, the circuit is continuously open whether you are talking or not. This wastes a lot of network space and time. When you disconnect, the circuit closes. Nowadays, the system has been digitized so that fibre-optic cables are used (for most of the connection, not all the way) which carry several calls at the same time. Calls are transmitted at a fixed rate per second.

VOIP uses packet switching technology to connect calls. Unlike circuit switching, this network does not waste any space. If you are talking it means that the other person is listening. This is not a full connection. It can be likened to using only half the connection at a given time. Also, dead air time, when nobody is speaking, is not used in the connection. Removing all this from the connection brings down the space used. So signals are sent only when it is needed, that is, when the connection is being used at a given point of time. Hence there is no wastage. Since the data is chopped up into packets, it is called packet-switching.

The voice is converted to data on sending which goes like an email. The packets contain information on where they are to go. Several routers along the way receive and send the packets along until the final one reassembles the packets according to the instructions in it and converts it back to voice.