The grades are used as a measure of performance difficulty in more formal lessons. There are exams at each level. I believe there are certain criteria which define what is required at each level.
It goes up to grade 8.
From memory, grade 1 is very basic with simple rhythms and straightforward note patterns. As you progress the grades, the rhythms get more complex and techniques such as slap and tapping are introduced and the songs get more challenging.
It's about performance of covers, not music theory.