What does ^= mean in C/C++?

It is the XOR assignment operator. Basically:

x ^= y;

is the same as:

x = x ^ y;

This means preform an XOR operation on contents[pos++] using key[shift++] and set contents[pos++] equal to the result.

Example:

contents[pos++]     00010101
key[shift++]        10010001
                    --------
                    10000100

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