The basic process is that when you perform an upgrade to Windows 10 (over a genuine Windows 7 or 8.1 system), an anonymous and unique hardware hash is generated that is based on your systems hardware configuration. Since it is anonymous, you do not have to use a Microsoft Account. This hardware hash is generated even if you choose to install Windows 10 with a Local Account.
That same hardware hash is sent to Microsoft servers and a corresponding certificate is created to validate your systems activation status. From this point forward any future installs, including one where you delete all partitions and install Windows 10 from scratch, will be activated because of that unique hardware hash and the corresponding certificate. Since it is all stored on Microsoft?s servers there is no reason for us to keep a backup either.