DS7 was fascinated with letters very early. Before he was a year old, he was aware of letters and starting to learn them, mostly through his obsessive focus on letter and number puzzles that my dad made for him. Around that same age (12 mos. or a bit more), he would see exit signs (everywhere, of course!) and point at them while shouting "E!" in an excited voice. I remember that it always sounded like he was seeing an old friend. It was that kind of pure joy in his voice.
This letter-identification fascination also came about when speaking was fairly new to him (a few months at most), so there were times when he'd say a letter and I'd wonder if he was trying to say the word and just couldn't. Of course I'd shake my head at how ridiculous that was. But looking back now, I wonder.
He read individual words before he was 3yo, though it's hard for me to say exactly when that started because he would memorize every book he ever looked at. We have a great video of his reciting "The Grinch who Stole Christmas" when he was 2.5yo. Hilarious! So cute!
The first time I know for sure that he read a book he had never seen before was when he was 3.5yo, so by that point, there was no doubt that he was really reading and not just memorizing.
I think he learned whole words at first, but his early fascination with letters and his ongoing skill at sounding out new words makes me think there's something happening phonetically, too. To this day I can't give him those "read aloud a list of words and tell what reading level he's at" tests because he can pronounce even the craziest words correctly. He doesn't know what any of them mean, but he can "read" them.
I don't think that helps you at all, but maybe my observations can be added into everyone else's to make something sensible come out?
