If I'm not mistaken they use the abs brake module to slow the free spinning wheel(s).
This is the best way I've seen it explained.
Special Order for Laredo, Optional for Limited, Standard on Overland
Transfer Case: NV247
Transfer Case Fluid: Mopar NV245/247/249 fluid, P/N 05016796AC ONLY
4 All-Time: Uses a gerotor-driven hydraulically-actuated progressive clutch pack to transfer torque to the front axle. Under normal conditions, the unit operates in RWD but transfers torque to the front axle once wheel spin occurs. Suitable for use on all surfaces/conditions.
Neutral: allows flat-towing as the transfer case is disengaged from the transmission
4 LO: Locks front and rear axles together and disengages the progressive coupler. This also adds a 2.72:1 gear reduction, giving you 2.72 times more torque at the wheels but makes your Jeep 2.72 times slower. Not recommended for use above 25mph. Also, not for use on paved surfaces. Off road/snow only!
Editorial Notes: Quadra-Drive is the "top-of-the-line" 4WD system offered by Jeep for the WJ, and one of the biggest reasons the WJ earned so many industry awards and accolades upon release. It uses the same transfer case as Quadra-Trac II but added limited slip differentials front and rear called "Vari-Lok". These operate on the same principles as the transfer case, only instead of transferring torque front to rear, they transfer side-to-side. This means you truly have 4 driven wheels with QuadraDrive, something not offered on any of the other 4WD systems. Unfortunately, the same reliability and fluid-compatibility issues from Quadra-Trac II affect Quadra-Drive so transfer case failures are possible.
Off-road, the Vari-Lok differentials give tons of traction and often help the WJ hang with more-built rigs. They function better than most other LSDs due to their excellent reaction time and ability to operate with one wheel in the air. Unlike the older Trac-Lok differentials offered by Jeep, they operate with virtually no wear in normal driving (since their clutches are not pre-loaded) and also offer considerably more torque-holding power.
One slight disadvantage: the VariLok differentials require Mopar friction modifier with their gear oil, making maintenance slightly more expensive. If the wrong amount of friction modifier is added, the differential will either bind or slip too much. Redline's 75W140 gear oil has the proper amount pre-mixed, as does Amsoil's Severe Gear. Other oils have *some* friction modifier already added but not enough so you'll have to add a little more until it doesn't bind.
QuadraDrive has one other slight disadvantage - by adding VariLok differentials, Jeep changed the differential carriers and axle shafts for front and rear differentials. This makes installing any other locker/limited slip impossible without procuring the appropriate parts from a Quadra-Trac 2. If you MUST have a locker, start with a Quadra-Trac II or Selec-Trac vehicle. However, most users of Quadra-Drive (myself included) are very happy with their operation.