It is predominantly the process by which towns and cities are formed and become larger as more people begin living and working in central areas.
这个by是对process的解释，表示通过以下的原因导致……
which代表的是process，它是这个长句后半部分(by之后)的主语，从towns到句尾都是在阐述which所代表的process.
predominantly这个副词修饰的是is，相当于obviously的意思和用法。
整个句子可以缩写成 It is predominantly the process.这句就是本长句的主句。只是需要对process进行详细的解释，才有了by后面的部分。
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