It was a settlement. The devs decided, for reasons that are not public, that it would be easier to just pay Nintendo some money and take down the emulator than to fight them in court. It's very possible (even likely) that they figured it would be more expensive to fight Nintendo's lawyers than to just pay a fixed amount up front.
That's quite often the case with thee issues - it's simply a finance game by the player with the deep pockets - they can afford to effectively bankrupt a smaller player who may have done nothing wrong.
They don't actually provide decryption keys, the user has to either extract them from their own Switch or find them elsewhere online. However, it could be argued by Nintendo that using an unreleased game ROM for testing proves that the devs themselves were guilty of piracy, and were therefore somehow condoning the use of their emulator for piracy.
Either way, we won't know how well Nintendo's arguments would have held up in court, because the devs settled rather than fight it out.