Invented in 1972 in Japan by Takuo Aoyagi, it is based on the observations of the colour change of blood when mixed with oxygen, and a technique called photoplethysmography
The Photoplethysmogram, or PPG was first observed in 1936, by Alrick B. Hertzman who coined the term “Photoelectric Plethysmograph” due to the fact that the technique relied on using a light source and photocell (Photoelectric) to observe the light interaction with tissue. Hertzman theorized the regular pulsations that were seen could only be caused by the changing volume of blood in tissue synchronous with the beating of the heart (Plethysmograph). The term has more or less stuck, now shortened simply to Photoplethysmography or PPG.
The lights on the bottom of your smart watch are used for monitoring your heart rate. Some smart watches may even use these lights to also measure how well oxygenated your blood is. So, to be effective at measuring your heart rate and or blood oxygen saturation, your watch should fit well and not hang loose