Hiya,
There is a direct acting (mechanical, capilliary type) thermostat which has a sensor in the hot water jacket. This then acts to open or close a flap at the bottom LHS of the firebox, to regulate the airflow.
The 1-8 dial on the top regulates the sensitivity of the thermostat, so think of it as entering a setpoint of how hot you want the water to be.
Does that help?