Lost iphone

Depends. If Find My is turned on, it requires knowing the Apple ID password to turn it off. Without turning off Find My, it can't usually be reset via the iPhone itself. And I believe activation lock (requiring knowing the Apple ID and Apple ID password) is active with on an iPhone with Find My turned on.

Activation Lock for iPhone, iPad, and iPod touch - Apple Support

This isn’t a matter of turning off Activation Lock. If you put a phone into lost mode remotely, lost mode can be turned off by entering the phone’s passcode. That will make the phone usable, and will also allow access to any data on the phone.

From: https://support.apple.com/guide/findmy-mac/mark-a-device-as-lost-fmm0e3934777/mac

You can also turn off Lost Mode on iCloud.com or from your iPhone, iPad, iPod touch, or Apple Watch by entering the device’s passcode (the one you use to unlock your device). For iPhone Leather Wallet, you can turn off Lost Mode by attaching the wallet to your iPhone.

Is it the two factor authentication? It's a 6-digit code. If you have another Apple device it will be sent to your other devices too. There might be other ways to verify (I think via email?).

Two-factor authentication for Apple ID - Apple Support

This discussion mentions it.

Lost iPhone: Two-factor authentication an… - Apple Community

When you enabled 2FA you were prompted to add additional trusted phone numbers to receive codes. You can receive codes on any numbers you set up, they didn’t have to be Apple devices. To use an alternate number that you set up click “didn’t get code” on the 2FA dialog.

If they know your passcode, they can access the device.

You can erase it, then they can’t use it. But if it is marked lost you can remove the lost status by entering the passcode.

I was thinking of what could happen if it's completely reset before the owner gets a chance to put it in lost mode.

It can’t be completely reset if Activation Lock/Find My is enabled. That would be a good outcome, because your content would be erased.