My research and AI's responses seem inconsistent or unsatisfactory, so I prefer to ask these questions to Xbox players, thanks to anyone who takes the time to respond!

Are the games actually emulated or are they just downloaded digitally using the disc as a key?
Does the compatibility transform games significantly or is it a remaster-like optimization?
Is it possible to use this feature offline therefore not caring about any Microsoft server support cessation?
Are there significant differences in how backward-compatibility works on Xbox One versus Xbox Series X?
What are some other aspects of this backwards compatibility feature that are worth mentioning?

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[–] sjmulder@lemmy.sdf.org 5 points 1 day ago

The Xbox 360 uses a processor with a different instruction set which means the executable on the disc simply isn't compatible with the Xbox One and Series X|S. For those, Microsoft have worked with game vendors to convert the executable (from binary, not source) to the other platform: "static recompilation". The new executable must be downloaded to play the game.

For the Xbox One, the architecture is very similar to the Series X|S so it can mostly just run it like you can run Windows 7 games on Windows 11 with compatibility tweaks applied by the operating system.