It’s a custom solution called pressure-vessel, which seems to be based on flatpak. You can read about it here. This is used to create a reproducible linux environment and has nothing to do with the windows translation layer. They run wine (proton) inside the container as you would expect.

There is a recent effort to port this solution outside of steam in the form of umu. As far as I know it’s in a working state but I don’t know if it’s at feature parity with steam, especially on the game-specific fixes front. The end goal is to be a universal launcher that can be used from all frontends, so that all windows games run reliably and identically regardless of which GUI you use to manage your games.

EDIT: welp, I just now noticed this info has already been posted by another user 🤷