In Xcode,
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what does it mean to drag from the orange ViewController icon to lets say a Label.
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how is this different from dragging a line from the Label to the interface to setup an outlet?

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If you don’t use the assistent editor (interface builder and header file) then one way dragging is making an outlet, and the other way is to make an action (for example to make a UIButton IBAction method).
When you use the assistent editor you can just drag from the UI object to the header file and choose to make an outlet or an action: