This grenade has an impact detonating fuze. 
An internal weighted firing pin moves forward on contact initiating the primer / detonator exploding the grenade. It slides inside a central tube, but is held back in flight by a light creep spring. 

Prior to firing, this firing pin is held in a locked safe position by two mushroom shaped “retaining bolts” set in holes in the side walls of the lower fuze housing. These bolts are retained by a threaded collar with a “windvane” feature. The windvane is immobilized by a brass locking sleeve, snapped in place below and secured by a safety pin. 

To operate, the grenade is inserted in the rifle, and clipped to the muzzle. The safety pin is then removed. When the grenade is launched, the sudden acceleration causes the locking sleeve to set back, freeing the windvane. Air flow causes the windvane to spin, unscrew and move downward, exposing the buttons which fall out after the grenade has traveled a safe distance. The grenade is now armed. 

Production was halted in January of 1915 and further orders canceled. The remaining stocks of grenades were used up or converted to a simplified design. The updated grenade was designated the No.20 Grenade. 

The No.3 Mk.I is arguably one of the most desired British rod grenades today. It is not only sought by militaria collectors, but also by science fiction fans who create and collect replica movie props. It turns out that for the first episodes of Star Wars, the special effects prop makers used various militaria, converted into futuristic looking weapons. Parts from the No.3 grenade were used to fabricate various versions of the now famous "Light Saber". This has created an unusually high demand for quality specimens of the No.3. Luckily there have been folks that make quality reproductions of the appropriate parts, which apparently has helped fill the demand.