7zip doesn’t know folder path of drop target. Only Windows Explorer knows exact drop target. And Windows Explorer needs files (drag source) as decompressed files on disk. So 7zip extracts files from archive to temp folder and then 7zip notifies Windows Explorer about paths of these temp files. Then Windows Explorer copies these files to drop target folder.
To avoid usage of temporary files, you can use Extract command of 7zip or drag-and-drop from 7zip to 7zip.