An explanation from the Blender Manual
This tool takes the currently selected faces and creates an inset of them, with adjustable thickness and depth. Think of it as like creating an edge loop, but relative to the selected edges, even in complex meshes.
The tool is modal, such that when you activate it, you may adjust the thickness with your mouse position. You may also adjust the depth of the inset during the modal operation by holding Ctrl.
The Inset Tool is commonly used to inset faces to create an edge loop within the selected face(s). In the example in this lesson JW selects edges rather than faces to create an edge loop inset to the selected edge loop. If that makes sense.
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