I'll restate the info so that it is hopefully easier to understand.
BMW instrument clusters of that era were designed to bridge the transition from displaying the analog values directly from the sensors to displaying values reported over the digital communication links i.e. CAN bus and K-line.
To do that all of the gauges and lights are software driven. The instrument cluster is built with all of the analog input circuitry needed for traditional inputs, plus CAN bus and K-line communication. The microcontroller uses a software setting to decide if it should display the value it reads from a direct input wire, or wait for a CAN bus message with the information.
That way the same instrument cluster can be used with an older engine that had a directly wired temperature sensor and tach output, or an updated engine where that same information is reported using CAN messages. It can be used with a chassis that only has a reed switch on the differential, or one that reports the speed using the ABS controller.
This works-with-everything features was designed for the benefit of the factory, not for you. BMW doesn't document it. People have mostly reversed engineered the software EEPROM settings and the CAN bus messages, but not every detail. The chassis wiring harness is typically optimized for the few engines that the car might be built with, so a MY2000 harness is likely missing some wires that older chassis had e.g. to support the M52 and M52tu engines, just like the MY1999 chassis is missing the wires to support the throttle-by-wire needed with the M54.