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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[–] RightHandOfIkaros 8 points 22 hours ago* (last edited 21 hours ago) (1 children)

AI is not a great source to ask for any sort of factual information, just a heads up. Its good for creating new stuff, like improvising story narratives or something like being a TTRPG dungeon master, though. I just wouldn't ever rely on anything it says to ever be factually true.

Im not an Xbox/Microsoft employee, but I will answer to the best of my knowledge. Some or all may be wrong though.

Both.
It does not transform the game at all as long as there are no bugs. Usually the only benefit is increased internal resolution, and sometimes increased framerate Everything else is identical to the original release.
AFAIK, no. When you install the game it doesn't actually copy the files, it downloads them because some of the files are patched. No internet means you cant download. I think it also needs occasional connection to check. I do think you can play offline but not for 20 years straight.
To my knowledge, no, there is no significant difference. I think it probably is exactly identical, actually. It is however, different from how backwards compatibility worked on the Xbox 360. It is significantly improved.
Cross-generational System Link. Its cool being able to have one player on Original Xbox and one on Series X in the same game.

[–] [email protected] 1 points 20 hours ago (1 children)

In reference to point 2 I would like to ask you a question: do the x86 versions that are downloaded offer improvements over the original X360 games in terms of image contrast (notoriously dark on that platform) and audio? PS3 games sounded better at the time due to blurays and audio chip.

[–] RightHandOfIkaros 5 points 20 hours ago* (last edited 20 hours ago)

It is exactly the same game. Audio quality will be identical to the X360 release.

The picture may be a bit brighter, I haven't noticed the X360 being darker. But picture output is effected by the emulator in the same way that picture output on a N64 emulator will appear brighter than a real N64 plugged into the composite plugs on an LED TV.