That's right - it's a cascade, which will seem appropriate once you have the aphorism.
It's the running totals that are added.
So line one has just the circled letter, say A.
Line two has two letters changed. If they are both As to begin with, they both become B.
Line three has three letters changed. If they all start as A, the left and right become C (A + B), and the middle one becomes D (B + B).
Any mistakes will multiply rapidly and produce gibberish, as I can attest.