Here's the short version: Under the scab, inflamation debrides the damaged and destroyed tissue (inflamatory phase). Soon after, epithelial cells start covering the raw wound inder the scab, and fibrous tissue, binding the wound together forms, along with the creation of new blood vessels. Granulation tissue forms at the margins and bottom of the wound, making the wound shallower and smaller. Finally, collagen forms, binding the new cells together and, after a while, the scab sloughs off.
Note that scarring -- another process -- is also occurring at the same time.
That was the short version. Actually we don't completely understand the entire process of wound healing yet. Lots of various processes occur simultaneously, and sometimes we don't understanding the timing or the end result.
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