Here's what happens:

A group of numbered envelopes are held in the performer's hand. Audience members call out the numbers on all but one of those envelopes. After each envelope is selected, the performer crushes it into a small ball with his bare hands and tosses it aside. When the remaining envelope is opened, a very sharp (very real) razor blade is carefully tipped out. It is then used to slice up the remaining envelope for a dramatic finish.