Nearby is actually a set of APIs that are available to developers to implement in apps. On the user side, there's nothing you need to do other than install and use apps that happen to implement Nearby. There are virtually no settings to tinker with, either. Nearby is present on all modern Android devices via Google Play Services, which is updated quietly in the background on a regular basis.
Nearby uses three different signals to determine when two devices are close enough to connect—Wi-Fi, Bluetooth, and audio. The Wi-Fi component doesn't actually connect two devices directly over Wi-Fi, but it does compare the list of Wi-Fi access points each device can see. If the list is close or both devices are on the same access point, that's a good sign they're very close to each other in the real world. Bluetooth contributes by transmitting a special token which can be seen by other devices using Nearby. Finally, and most interestingly, there's the audio component. Nearby allows phones to emit ultrasonic sound which is imperceptible to humans, but is detected by the microphone on other phones and tablets. If two devices can "hear" each other, they're in close proximity.
So, now you've established that two phones are close to each other. What does that get you There are two main APIs supported in Nearby, one for general connections and another for messaging. With the connections API, developers can create collaborative lists, enable local multiplayer games, or even pair two devices for a multi-screen gaming experience. The messaging API does what you'd expect, allowing instant real time messaging between two devices. However, Nearby messaging is not encrypted, so you should not use it for sensitive communication.
You don't have to do anything during the pairing process, but you'll have to give the OK the first time you access Nearby functionality in an app. When Nearby is active, a notification provides quick access to the Google account options on your phone that let you enable or disable Nearby for each installed app that supports it.
Google recently extended Nearby to allow bluetooth beacons to pop up notifications to apps or web pages. So you might enter a museum, and get a notification linking you to an audio tour. United airlines might link you to free entertainment options while waiting at the gate, and your Chromecast will smooth out the setup process by popping up a notification to tap on instead of requiring you to type in a setup web address.
To take Nearby for a spin on your phone, you'll want to grab a few apps that show off the technology. Here are some of the coolest.
Trello is a project manager and to-do tracker that's organized into "boards." You can create a board for anything you want, and in the overflow menu is an option to share a board via Nearby. You can also scan for other boards that are being shared over Nearby from the main screen in Trello.
Pocket Casts is one of the most popular podcast players on the Play Store, and it's always been fast to adopt new technology. In the Explore section of Pocket Casts, there's a tab for Nearby. This will let you share your podcast subscription list with people around you while they share with you. It's a cool way to swap subscriptions with friends who also use Pocket Casts.
Thought uses the Nearby messaging API to create conversations in your local area. You can create a profile or just chat anonymously with anyone else running Thought in your immediate vicinity.
Radon is a super-simple sharing app based on Nearby. Simply find a link you want to share and select Radon from the system sharing menu. The person you're sharing the link with needs to have Radon running, but the app quickly spots the device using Nearby. The link is pushed over and you're done. No logins or typing necessary.
This is just scratching the surface of what's possible with Nearby. It's very cool, but you don't see enough apps that support it. Hopefully devs pick up the pace and start building more proximity-based features with Nearby soon.