A pseudo terminal (PTY) is a software device consisting of two
halves: a master and a slave. The slave device behaves identical to
a physical terminal; the master device is used by a process to
read data from and write data to the slave, thereby emulating a
terminal. Typical programs for the master side are telnet servers
and xterms.

Linux has traditionally used the BSD-like names /dev/ptyxx for
masters and /dev/ttyxx for slaves of pseudo terminals. This scheme
has a number of problems. The GNU C library glibc 2.1 and later,
however, supports the Unix98 naming standard: in order to acquire a
pseudo terminal, a process opens /dev/ptmx; the number of the pseudo
terminal is then made available to the process and the pseudo
terminal slave can be accessed as /dev/pts/<number>. What was
traditionally /dev/ttyp2 will then be /dev/pts/2, for example.

All modern Linux systems use the Unix98 ptys. Say Y unless
you're on an embedded system and want to conserve memory.

source code:

drivers/tty/pty.c